Trump’s Currency War Against Germany Could Destroy the EU

_{Photo credit: Olaf Kosinsky}

It’s just over a week after Donald Trump’s inauguration, and his administration has already indicated that it is preparing for global economic war. The currency war the White House has in mind is clearly aimed not just against China — which has long been suspected of “cheating” in order to win the globalization game — but also Germany: On Tuesday, Peter Navarro, the head of the new National Trade Council, claimed that Germany is using its currency to “exploit” both its neighbors and the United States. The White House evidently thinks of the European Union, and the monetary union that established the euro currency, as essentially a mechanism to protect German interests and extend German power — as an instrument of Germany, as Trump himself put it.

This fear of Germany is both an outlandish expression of paranoia and an idea with a long pedigree among some establishment economists and policymakers. Nobody doubts that the White House has tools at its disposal to strong-arm Germany into changing its economic policy, including its commitment to the euro, which currently binds the European Union together. Indeed, the Trump administration already seems to be doing just that.

The first version of such criticism directed at Germany came in the late 1970s and was focused on the European Monetary System (EMS), which preceded the existence of the euro. The EMS was a fixed (but adjustable) exchange rate system that reproduced most of the features of the global Bretton Woods system established in 1944 and was designed by Europeans as an immediate reaction to the mismanagement of the U.S. dollar under President Jimmy Carter. Dollar weakness sent floods of capital — short-term money — into Germany, pushing up the Deutsche mark against the French franc and vastly complicating trade relations within the European customs union.