GERMANY BENEFITS FROM THE EURO IN MAINTAINING ITS TRADE SURPLUS!

Each country’s currency usually reflects it relative economic health!  When a nation runs a trade surplus—selling more of its products overseas, than it buys—it is running a trade surplus.  Foreign buyers, as well as overseas investors, convert their funds to the seller’s currency.  That greater demand, due to net foreign exports, increases the demand for the denominated currency, thus making it stronger.  Conversely, when nations run a trade deficit—buying more overseas than selling—its currency will decline in value.

The President of the European Council, Donald Tusk, told Donald Trump, on his recent trip to several summits in Europe, that Germany continually runs a large trade surplus within the European Union, as well as with the U. S.  I believe that the trade problem, in this case, is primarily due to Germany’s membership in the Euro Area, the 19 (of 28) E. U. members, that use the common currency, the Euro.

The reflection of Germany’s economic health is somewhat muddied since it shares the same currency as 18 other nations.  Under normal conditions (a single-country currency), there is a self-regulating mechanism in foreign trade.  Strong currencies create a price  disadvantage for themselves, making their products more expensive than their overseas competitors.  Likewise, weak currencies help expand trade exports; because, the nation’s products are more attractive, when priced in the weaker currency.

The single Euro currency must be valued the same way, however, by foreign-exchange traders, since it is the unit of exchange for all 19 nations.  For Germany, and any other Eurozone members that run a trade surplus, this provides a perfectly legal advantage–the Euro is weaker than if it used the old Deutschmarks.   The advantage, of using the Euro applies to transactions, both within the E. U. and globally.  And the deficit nations must contend with a high-priced currency.

Accordingly, the Euro trades around the mean (roughly, the average) for the various nations in the Euro Area.  This enables Germany to run a larger surplus than it otherwise would.  And likewise, the negative impact of the stronger currency provides a price disadvantage for nations with weaker economies, that run a trade deficit.

In effect, Germany has maintained a low unemployment rate, 3.9% as of April, as compared to Spain at 17.8%, and Greece at 23.2%, by exporting its unemployment.  Besides the great many benefits of membership in the European Union brings, they far outweigh the negatives.  But, after so many years, the Euro Area needs to be changed, so that the E. U. remains relevant.

The convenience of a single currency—in two-thirds of the member nations—seems to be outweighed by the structural trade imbalance that the euro provides.  And, that problem will never be solved as long as there is a common currency!  Whether a Euro member is weak or strong, the common currency will keep them in that same alignment–and this needs to stop!

NOTE:  Germany is merely taking advantage of an edge that is available to it; however, its actions might not be quite in keeping with the spirit of why the E. U. and the Euro Area were established.

 

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