Two weeks ago, German finance minister Wolfgang Schauble confirmed Donald Trump's charge that the Euro is far "too low" for Germany, but said he is unable to do anything about it and instead blamed Mario Draghi. “The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position,” he told Tagesspiegel on February 5. “When ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus . . . I promised then not to publicly criticise this [policy] course. But then I don’t want to be criticized for the consequences of this policy.”
Then, on Saturday, his boss German Chancellor Angela Merkel echoed her finance minister, and also admitted that the euro is indeed "too low" for Germany, but once again made clear that Berlin had no power to address this "problem" because monetary policy was set by the independent European Central Bank.
"We have at the moment in the euro zone of course a problem with the value of the euro," Merkel said in an unusual foray into foreign exchange rate policy.
Merkel also confirmed that Germany benefits from not having the Deutsche Mark, whose value would be far higher, and instead piggybacks on the weakness of other European nations, implicitly confirming recurring allegations that Germany benefits from the misery of Europe's periphery.
"The ECB has a monetary policy that is not geared to Germany, rather it is tailored (to countries) from Portugal to Slovenia or Slovakia. If we still had the (German) D-Mark it would surely have a different value than the euro does at the moment. But this is an independent monetary policy over which I have no influence as German chancellor."
We showed this :fair value" divergence two weeks ago in the following chart:
Merkel's comments addressed recent criticism by Peter Navarro, who has accused Germany of profiting from a "grossly undervalued" euro. The chancellor made her remarks at the previously discussed Munich Security Conference, where Vice President Mike Pence was eager to reassure European allies of American "unwavering" support for NATO even as he asked the organization's member states to pay up.
The euro has fallen nearly 25 percent against the dollar over the past three years, touching a 14-year low of $1.034 in January. But it has since risen to roughly $1.061. In late January, Peter Navarro, the head of Trump's new National Trade Council, said the euro's low valuation was giving Germany an edge over the United States and its European Union partners.
His comments came weeks after Trump himself said the dollar's strength against the Chinese yuan "is killing us", deepening concerns that his administration could pursue a more confrontational, protectionist approach to trade.
Merkel and other German officials pushed back forcefully at the time, however in an odd reversal, first Germany's finance minister, and now Merkel herself admits that Trump is right, at least when it comes to Germany, whose current account has continued to soar, and come to think of it, with Germany's export dominance, so has the current account of Europe, which in December hit a new all time high.
A recent note by Bank of America's Athanasios Vamvakidis confirmed how materially the EUR is undervalued relative to the USD:
Our models suggest that the Euro is undervalued, but only by about 2% in trade weighted terms. It was much more undervalued in the early days of QE, by 7%, and in the early 2000s, by 18%. However, EUR/USD is undervalued by 9.6% (Chart 4). This reflects the strength of the USD, which is overvalued by 13.4% in trade weighted terms. Compared with the rest of G10, the Euro looks cheap against NZD, CHF and JPY and expensive against NOK and SEK (Chart 5).
And so, not one but two strong hints by Germany's most powerful politicians that Trump should take his fight against the "grossly undervalued" euro away from Berlin, and focus on Frankfurt and the ECB, and specifically Mario Draghi, will Trump's inevitable focus on the European Central Bank - and its massive balance sheet...
... change the dynamics of European monetary policy, and prompt an even faster taper of Draghi's asset purchases? We don't know. We do know, however, that we will pay good money for a solid, decent twitter fight between @realDonaldTrump and the @ECB, in other USD or EUR.