"Is Germany a currency manipulator?"

From the Bruegel blog:

What’s at stake: the Financial Times reports that Peter Navarro, head of the US’s National Trade Council, has accused Germany of currency manipulation. He claims that the country uses a 'grossly undervalued' Euro to 'exploit' its trading partners. Angela Merkel replied that the Euro is managed by the European Central Bank, on which Germany does not exert influence. We review what the economic blogosphere thinks of this.

Paul Krugman argues that Navarro is right and wrong at the same time. Germany in effect has an undervalued currency relative to what it would have without the euro, against its neighbors. This is the result of a large real depreciation during the euro’s good years, which has only been partly reversed, because wages are downward sticky, and Germany has refused to support the kind of monetary and fiscal stimulus that would raise overall euro area inflation, which remains stuck at far too low a level. But this does does not necessarily mean that the euro as a whole is undervalued against the dollar. The euro is weak, but there’s no clear relationship between the problems of Germany’s role within the euro and questions about the relationship between the euro and other currencies.

Jeromin Zettelmeyer at PIIE argues that Navarro’s comments are worrisome because of two assertions he made earlier in September 2016, both of which seem to underpin the thinking behind his criticism of Germany. First, that freely floating currencies would eliminate trade imbalances – and by extension, that trade imbalances are a manifestation of “currency manipulation.” Second, that Germany’s euro membership, as a policy choice that keeps Germany’s exchange rate undervalued, is an act of currency manipulation. Both these assertions are incorrect.

On the first point, freely floating currencies are consistent with large, persistent deviations from trade and current account balance. This is because freely floating exchange rates are shaped not only by currency supply and demand associated with trade, but also by currency supply and demand associated with investment flows.

On the second, the Euro’s undervaluation today is largely a consequence of the euro crisis. So the assertion that German euro membership constitutes currency manipulation is baseless for two reasons: Euro membership did not reflect any decision, on behalf of the German government, to steer its exchange rate. Nor is Germany’s competitiveness a structural feature of euro membership. Euro membership merely implies that the real exchange rate takes longer to adjust to shocks than would be the case in a floating system....MORE (Coppola, Klein, Kotlikoff)