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President Trump’s economic war against Germany and the euro

Giancarlo Elia Valori



[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] J [/yt_dropcap]ust a week after his official installation at the White House, Donald J. Trump lashed out at China, accused of manipulating its currency to “win the globalization game”, but also at Germany which, as the President of the new National Trade Council, Peter Navarro, said “is exploiting both its neighbours and the United States with the euro”.

The accusation is not new. In the early 1970s the United States accused the old European Monetary System (EMS) of keeping the currencies adhering to it artificially high.

Inter alia, the EMS – with fixed exchange rates but with predefined fluctuations within it – was the European response to the US-prompted end of the 1944 Bretton Woods agreement.

Nevertheless, it was also Europe’s reaction to the planned weakness of the dollar during Jimmy Carter’s Presidency, when precisely the dollar area sent huge capital flows into Germany, which had a “high” Mark, thus pressing it against the French Franc and hence destabilizing the entire European internal monetary exchange system.

Furthermore, in the early 1980s, the British Labour Prime Minister, Denis Healey, got convinced that the EMS was a real German “racket”, considering that the German Finance Minister had told him that his country planned to have a comparative advantage precisely by limiting the depreciation of the other European currencies.

This happened because Germany had lower labour cost-driven inflation rates and, hence, a currency with fixed rates would have anyway ensured export-driven surpluses only to Germany.

However also the G20 long negotiations have never led to any result: currently, in absolute terms, the German export-led surplus is much larger than China’s, namely 8.6% of the German GDP.

In fact, according to IMF estimates, the surplus is equal to 271 billion US dollars, a huge sum capable of changing all global trade flows.

Finally Chancellor Angela Merkel replied to Trump (and to Navarro) by recalling that the European Central Bank is the institution issuing the euro, but it is not lender of last resort. Nevertheless, she has not contradicted the US President about the fact that the Euro is really undervalued.

Furthermore, when we look at the currencies undervalued as against the US Dollar, we realize that the most undervalued currency is the Turkish Lira, followed by the Mexican Peso, the Polish Zloty, the Hungarian Forint, the South Korean Won and, finally, our own Euro.

Finally, when we look at the number and size of transactions denominated in euros, the European currency is already the second most traded currency in the world.

Hence, probably the undervaluation of the Euro against the US Dollar originates more from the expansionist policy of the European central Bank than from Germany’s actions for its exports and monetary parities.

Certainly Germany gains in having a currency that is much weaker than it would be if it were only a German currency but, on the other hand, with a Euro artfully devalued, the “weakest” Eurozone countries succeed in having lower interest rates than they could obtain with their old or new national currencies.

Moreover, it is worth recalling that Germany exports profitably both in countries where the currency is stronger than the Euro and in regions where the currency is even more depreciated as against the US Dollar, such as Japan.

According to last year’s data, the United States have a trade deficit with Germany equal to 60 billion US dollars.

Germany exports mainly cars, which account for 22% of their total exports to the United States.

It also exports – in decreasing order – machine tools, in direct competition with Italy, electronics, pharmaceuticals, medical technologies, plastics, aircraft and avionics, oil, iron and steel, as well as organic chemicals. All German exports are worth 35% of its GDP.

Why, however, is the Euro depreciated because of Germany?

Firstly, since 2000 the German cost of labour has grown by 20-30% less than in the Eurozone’s German competitors.

Hence German products were ipso facto 20% more competitive than those of the others, without any exchange rate manipulation.

If Germany still had had the Mark, it would have automatically appreciated by 20%.

The appreciation of this hypothetical Mark would have changed demand, by reducing exports and increasing imports by the same percentage.

In that case, the ideal would have been a floating exchange rate – and this should also be the case for a re-modulated Euro compared to the current situation.

A fluctuation prefiguring the creation of a new monetary “basket” with the major currencies, with exchange rates floating within a certain range, but much more realistic than the current ones.

A further cause of the current account surplus in Germany is the intrinsic strength of its exports – hence Germany does not suffer the competition of low-tech economies, such as Italy’s.

Another reason for the excessive German surplus is the low domestic demand, with the relative increase in private savings.

An additional cause of the surplus is the fact that savings have long been higher than investment.

In 2015, German savings amounted to 25% of the Gross Domestic Product (GDP), while investment was worth only 16% of the GDP.

Obviously, another decisive reason for the accumulation of such a large German surplus was the fall in oil prices.

Therefore, the vast German surplus and the Euro undervaluation foster its exports, but block the exports of the other Eurozone countries.

In fact, according to our calculations, if Germany stimulated its domestic demand, thus allowing its inflation to increase, this would be enough for the final stimulus of global demand and, above all, it would make the Eurozone economies under crisis get out of their predicament.

Hence the real problem of too high a Euro is not so much for the United States, which can devalue as against the Euro whenever they want and anyway have still their own autonomous monetary policy, but rather for the single currency countries in the Mediterranean, which are experiencing a downturn caused by too low domestic demand.

Could we also do as Germany? No, we could not.

It is not possible for anyone in the Eurozone to create an 8% surplus, such as Germany, and not all countries could benefit from a devalued exchange rate of the European currency.

As many politicians say, restructuring the production system to increase productivity means – in a nutshell – years of deflation and high unemployment, which create a negative multiplier effect.

We cannot afford so – the social and economic conditions have already reached the breaking point.

Hence, let us put our minds at rest, the ”two-speed Europe” will last generations and it would be better if this could also be reflected in the single currency.

Or better in a series of two-three currencies deriving from the Euro with pre-fixed exchange rates floating within a range.

Furthermore, Germany will certainly replace China as the “bad” currency manipulator and there will be increasing competition between it and the rest of Europe.

Therefore, the German export surplus actually leads to an unfair competitive advantage over the Eurozone countries and, in other respects, over the North American exports.

This is the sense of the struggle against the Euro waged by President Trump and his future Ambassador to the EU, Ted Malloch, who has stated that the Euro may “collapse” over the next eighteen months.

The Euro is certainly undervalued.

According to a study carried out by Deutsche Bank, the Euro is allegedly the most undervalued currency in the world, according to the criteria of the Fundamental Equilibrium Exchange Rates (FEER).

And the Euro is undervalued even if we look at its external value and the mass of transactions of the individual countries currently adopting it.

Hence, not only can Germany be accused of managing an improper comparative advantage over the dollar and the other major currencies but, according to the FEER data, the accusation holds true even for Italy and for the other single currency European countries.

With a view to solving the issue, some analysts – especially North Americans – think it should be Germany to leave the Euro.

On the one hand, Germany cannot revalue its currency (which is also a political problem – suffice to think of German savers) without the Euro appreciating also for the Eurozone weak economies, such Italy and Spain.

The World Bank believes that the German trade surplus is at least 5% too high and, hence, the German exchange rate is largely undervalued by at least 15%.

In fact, the differential between the German Euro and the Euro of the Eurozone weakest countries is 20%.

This means that, in terms of Purchasing Power Parity (PPP), the Italian or Greek Euro is worth 20% less than the German one.

The issue could be solved with an equivalent 20% Euro revaluation, combined with an expansionary fiscal policy.

However, this cannot be done as long as Germany is within the Euro. This means that Germany cannot revalue the exchange rate without doing the same in the other 17 countries that adopt the European single currency.

This would mean definitively destroying the Italian, Greek, Portuguese and Spanish economies.

Therefore, if Germany came out of the Euro, its new currency would appreciate as against the non-German Euro and the other countries would have a devalued currency, which could help them in exports.

There are two ways in which the German trade surplus creates deflation – and hence crisis – in the rest of the Eurozone.

Obviously the first is by pushing up the value of the European currency.

A strong euro weakens the demand for European exports, especially for the most price-sensitive goods of the Eurozone Mediterranean economies.

Moreover, the high value of the European currency reduces the price of imported goods, thus negatively reinforcing the price fall – another deflationary mechanism.

And the German inflation which, as everyone knows, is lower than in the other Eurozone countries, further weakens the peripheral economies.

Hence a landscape marked by low domestic demand and national markets’ production crisis.

However, in Navarro’s and in Trump’s minds, there is the implicit belief that trade imbalances can be solved in a context of free-floating currencies.

It is not always so and, however, fluctuations apply only when there are structural changes in trade systems – in principle all players envisage and operate, for sufficient time, with fixed or maybe slightly floating rates.

Therefore, reading between the lines, what both Trump and Navarro really tell us is that the very Euro membership is an act of monetary manipulation.

Hence, what is done?

The unity of the European economy is broken, with unpredictable effects and further global chaos, while the United States acquire exports that were previously denominated in euros.

Or the United States could impose quotas or specific tariffs for Germany, which is illegal in WTO terms but, above all, would expose the United States to a series of reprisals and retaliation by Germany and probably also by the rest of the Eurozone.

There is no way out: therefore, again reading between the lines, probably Trump is telling to the Eurozone weak economies that they should leave the single currency, which is only in Germany’s interest, and create new post-Euro currencies, which will be somehow pegged to the US Dollar.

Or Trump and Navarro could define a new relationship between Euro, Dollar, Yuan, Ruble, Yen and some other primary currencies on the markets and impose a predetermined fluctuation between them, but obviously the Euro would enter this new “Bretton Woods” by being valued in line with the markets and not being overvalued as today.

Europe, however, shall put back in line and tackle all trade and political issues with Trump’s America, which will make no concession to anyone and, most importantly, does no longer want to favour Europe militarily, strategically, financially and commercially.

In particular, Donald J. Trump has in mind the big game with Russia and China. He is scarcely interested in a continent, such as Europe, which is not capable of defending itself on its own and shows severe signs of structural crisis.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs "La Centrale Finanziaria Generale Spa", he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group and member of the Ayan-Holding Board. In 1992 he was appointed Officier de la Légion d'Honneur de la République Francaise, with this motivation: "A man who can see across borders to understand the world” and in 2002 he received the title of "Honorable" of the Académie des Sciences de l'Institut de France


231,000 New Jobs Added in Western Balkans amid Ongoing Economic Challenges, Emigration

MD Staff



A 3.9 percent increase in employment over the last year has led to the creation of 231,000 new jobs throughout the six countries of the Western Balkans, according to the “Western Balkans Labor Market Trends 2018” report, launched today by the World Bank and the Vienna Institute for International Economic Studies (wiiw). Unemployment also fell from 18.6 percent to 16.2 percent, reaching historic lows in some countries.

Leading the way for employment in the region was Kosovo, which saw an increase of 9.2 percent, followed by Serbia (4.3 percent), Montenegro (3.5 percent), Albania (3.4 percent), FYR Macedonia (2.7 percent), and Bosnia and Herzegovina (1.9 percent). Despite this progress, however, low activity rates – particularly among women and young people – along with high rates of long-term unemployment and a prevalence of informal work, continue to pose challenges for sustained economic growth in the region.

“The region has made great strides in improving labor market outcomes over the last year – meaning more people are finding jobs,” says Linda Van Gelder, World Bank Country Director for the Western Balkans. “However, we continue to see high rates of people who are not in employment, education or in training programs and we need to find ways to link them to future opportunities.”

Youth unemployment of 37.6 percent is a key challenge for the region. However, this rate is down from last year and nearly every country in the region is experiencing the lowest levels of youth unemployment since 2010. Country rates range from 29 percent in Montenegro and Serbia, to more than 50 percent in Kosovo. According to the report, it may be difficult for young people who become detached from jobs or education for long periods to reintegrate into the labor market. They also face a wage gap, earning up to 20 percent less than those who find employment sooner.

The report also notes that female employment rates are on the rise but they still remain low by European standards. The employment rate for women across the region stands at 43.2 percent, varying from a low of 13.1 percent in Kosovo to a high of 52.3 percent in Serbia. The gender gap in employment has also narrowed since 2010, ranging from 28.9 percentage points in Kosovo to 9.8 percentage points in Montenegro.

“Economic trends in the region look to be headed in the right direction,” says Robert Stehrer, Scientific Director of the Vienna Institute for International Economic Studies. “Getting more people, particularly young and women into employment remains one of the key challenges in the region to sustain economic and social convergence.”

A number of obstacles to employment need to be addressed to reduce ongoing emigration from the region, especially common among young, educated people. In order to address this, further knowledge is needed. Countries in the region should synchronize their data on emigration and improve the registration and publication of migration statistics. By utilizing high-quality data that is in-line with international standards on workforce composition – both domestically and internationally – will produce accurate analysis of labor market dynamics in the region and allow for the design of policies that can simultaneously address the challenges of emigration and reap the benefits of migration.

Better linkages between secondary graduates and the labor market, as well as earlier interventions to retain students, can improve opportunities for employment. Policies, such as child care, care facilities for the elderly, flexible work arrangements and more part-time jobs would also promote labor market integration among women.

The report was produced with financial support from the Austrian Ministry of Finance.

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Economic Growth in Gulf Region Set to Improve following a Weak Performance in 2017

MD Staff



The Gulf Cooperation Council (GCC) region witnessed another year of disappointing economic performance in 2017 but growth should improve in 2018 and 2019, according to the World Bank’s biannual Gulf Economic Monitor released today in Kuwait.

The region eked out growth of just 0.5% in 2017 – the weakest since 2009 and down from 2.5% the previous year. The GCC region’s economies experienced flat or declining growth as lower oil production and tighter fiscal policy took a toll on activity in the non-oil sector. External debt issuance continued to rise to help finance large fiscal deficits.

Economic growth is expected to strengthen gradually, helped by the recent partial recovery in energy prices, the expiration of oil production cuts after 2018, and an easing of fiscal austerity. The World Bank expects growth to firm to 2.1% in 2018 and rise further to 2.7% in 2019. Growth in Saudi Arabia is expected to rebound close to 2% in 2018-19 and to strengthen similarly elsewhere in the region.

“Policy attention is shifting towards deeper structural reforms needed to sever the region’s longer-term fortunes from those of the energy sector,” said Nadir Mohammed, World Bank Country Director for the GCC. “While the recent increase in oil prices provides some breathing space, policy makers should guard against complacency and instead double down on reforms needed to breathe new life into sluggish domestic economies, to create jobs for young people and to diversify the economic base. Any slippage could negatively impact the credibility of the policy framework and dampen investor sentiment.

Looking forward, there are several downside risks that may weigh on activity. Lower than expected oil prices could exert pressure on the OPEC producers to extend or deepen their production reduction agreement and dampen medium-term growth in the GCC countries.

Although fiscal and current account balances are improving, the region continues to face large financing needs and remains vulnerable to shifts in global risk sentiment and the cost of funding. Geopolitical developments and relations within the region could slow growth prospects. Slippage in the implementation of country reform plans arising from weak institutional capacity will rob the GCC of the benefits of fiscal adjustment and of deeper structural reforms that aim to diversify their economies.

Over the longer term, the enduring dominance of the hydrocarbon sector in the GCC economies argues for the vigorous implementation of structural reforms.  The terms of trade shocks in 2008-09 and in 2014-16 barely dented the dominance of the hydrocarbon sector in the GCC, with the bulk of the adjustment so far driven by spending cuts rather than the emergence of other traded sectors.

Structural reforms should focus on economic diversification, private sector development, and labor market and fiscal reforms. The GCC states’ long-term ambitions are articulated in various country vision statements and investment plans, and aspire to build competitive economies that utilize the talents of their people.

Implementing these structural transformation programs requires continuing political commitment from the GCC governments.

Saudi Arabia has shown considerable leadership in this regard: the 12 “vision realization plans” associated with its Vision 2030 aspirations aim to significantly transform the economy over the next 15 years by lifting the private sector share of the economy from 40 to 65% and the small and medium enterprise contribution to GDP from 20 to 35%.

Transforming from an oil-dependent economy to a self-propelled, human capital-oriented one requires some fundamental changes in the mindset; some also call this a new social contract,” said Kevin Carey, Practice Manager at the World Bank.  “GCC countries do not need to discard their existing social contracts but rather to upgrade them to reflect new realities of low for long oil prices, increasing global competition and the long-term threats from technological and climate change.”

As with other Arab countries, the GCC states also face sustainability, equity and welfare challenges related to their pension systems. These issues need to be addressed urgently to prevent any negative impact on economic growth, fiscal sustainability, and labor market stability.

Among the potential solutions that could help improve pension outcomes, the Gulf Economic Monitor underscores the importance of improving efficiency by reducing the prevailing fragmentation in many of the GCC pension systems; making access and contributions as simple and systematic as possible through the strengthening of ID and IT systems and the capabilities of pension administration bodies; and strengthening the governance of pension institutions. If GCC countries wish to attract global talent, they will also need to consider potential solutions for expatriates that help to meet their long-term pension and financial security needs.

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Poland: Build on current economic strength to innovate and invest in skills and infrastructure

MD Staff



Poland’s economic growth remains strong. Rising family benefits and a booming jobs market are lifting household income while poverty rates and inequality are falling, says a new OECD report.

In its latest Economic Survey of Poland, the OECD encourages policy-makers to build on the country’s current economic strength and social progress in order to tackle major remaining challenges. To sustain rising living standards Poland has to develop its capacity to innovate and invest in skills and infrastructure, as is acknowledged in the government’s Strategy for Responsible Development. The report says that the level of expenditure on research and development, despite recent welcome rises and tax incentives, remains weak. Vocational training suffers from limited business engagement which is hindering many of the country’s plentiful small enterprises from modernising and improving productivity.

Poland is also ageing rapidly. The working age population is projected to decline markedly over the coming decades. The lowering of the retirement age risks increasing poverty among the elderly, particularly women, says the OECD. Women often have patchy career paths and their retirement age is now set to remain unusually low. Workers should be made aware of the benefits of working longer for their future pension income, the report says.

Despite efforts to improve childcare, it remains insufficient and expensive, especially in rural areas. More investment in childcare is required as part of a range of measures to help combine work and family life and strengthen the number of women in employment.

Presenting the Survey in Warsaw, OECD Deputy Secretary-General Mari Kiviniemi said, “Poland is in a strong position. A dynamic job market together with the Family 500 + programme has helped make economic development more inclusive. Many people now benefit from new opportunities and rising incomes.”

“The time is ripe to ensure that living standards continue to rise. Strengthening innovation, improving infrastructure and investing in skills will be crucial. With rising labour and skills shortages, many employers now realise how important it is to invest in training. The government must seize this opportunity to engage with them.”

Measures to improve tax compliance have succeeded in shrinking the public deficit despite higher spending on social benefits. But more resources – or shift in how they are used – will be needed to raise  spending in priority areas such as public infrastructure, healthcare and higher education and research.

Limiting reduced VAT rates, increasing environmental taxes and giving a stronger role to the progressive personal income tax would raise additional revenue while contributing to more equity and a greener environment.

Plans to reform higher education and improve research excellence and industry-science co-operation are welcome, the report says. The general health status of Poles and access to healthcare are very unequal, while environmental quality is below the average of OECD countries. Tax rates on air and water pollution and on CO2 emissions are low and many environmentally harmful fuel uses are exempt from taxation. Raising environmental taxes would provide stronger incentives to replace ageing coal-intensive equipment with greener alternatives.

A clear immigration policy strategy is also needed to better monitor integration of foreigners in line with labour market needs, the protection of their rights and their access to education and training.

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