Currency undervaluation is in the news, what with the US CVD case on tires from Vietnam, and a more recent US Section 301 investigation against the same country. So it is not coincidental that I found myself looking at the most recent US Treasury Report on currency manipulation, “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States” (January 2020).
Of the twenty countries reviewed by Treasury, ten (including Vietnam) found themselves on the “watch list”, having satisfied 2 out of the 3 criteria for designation as a “currency manipulator”. Among them are three euro area countries: Germany, Ireland and Italy. The Report paid significant attention to Germany, which the Report notes has the world’s largest current account surplus as a share of GDP and, according to IMF estimates, an undervalued currency of 8-18%, the highest among the countries reviewed.
Noting the euro area countries on the watch list, I found myself asking how undervaluation would be addressed in a CVD case involving Germany. Would a determination be done for Germany alone, when its currency is the euro? Wouldn’t it make more sense to analyze undervaluation for the entire euro area? As noted by the Treasury Report, “given the wide dispersion of economic performance across the euro area, the euro’s nominal exchange rate has not tracked [the] rise in German competitiveness.” In other words, the euro might be undervalued for Germany, but overvalued or appropriate for the euro area as a whole.
The Treasury Report notes that the European Central Bank has “not intervened unilaterally in foreign exchange markets since 2001”, so – depending upon how Commerce in practice applies its new undervaluation regulations in regard to government action – Germany may not be at risk. Yet the very fact that it is the ECB, not the German government, that manages the euro reinforces the logic of focusing on undervaluation for the euro area as a whole. To do otherwise feels to me like finding that the dollar is overvalued for California. But I am no expert in this field, so I am likely missing something obvious.