Poke out one of my eyes
By Scott Sumner
The news is becoming increasing surreal. This morning I saw the following story in the Financial Times:
The euro sank by about 0.5 per cent against the dollar, reaching a low of just under $1.12, while European equities rose – Germany’s Dax index was up by 2 per cent on the day.
In response, Mr Trump suggested that Europe was engaging in currency manipulation.
“Mario Draghi just announced more stimulus could come, which immediately dropped the euro against the dollar, making it unfairly easier for them to compete against the USA,” the US president wrote on Twitter. “They have been getting away with this for years, along with China and others.”
He also commented on the rise in European share prices, by Tweeting: “German DAX way up due to stimulus remarks from Mario Draghi. Very unfair to the United States!”
Where to begin?
1. There are serious academic studies that consider currency manipulation, such as Fred Bergsten and Joe Gagnon’s recent book. But they make it very clear that domestic monetary policy aimed at achieving a country’s macroeconomic targets are certainly not the sort of currency manipulation that should concern other countries. In the Eurozone, the need for monetary stimulus is far greater than in the US, on both the inflation and the employment front. So there is no basis for criticizing Europe on those grounds. The Eurozone needs monetary stimulus.
2. President Trump has been asking for monetary stimulus in the US, despite the fact that we are far closer to hitting our targets.
3. Monetary stimulus in Europe actually helps the US economy. Trump doesn’t seem to realize that economics is not a zero sum game. Faster growth in Europe is good for America firms, Chinese firms, Japanese firms, and Brazilian firms. If you don’t believe me, ask the Canadians how their economy did in 2009 (when their banking system was perfectly fine.) Canada had a recession in 2009, likely triggered by slow growth in the US and Eurozone.
I am actually surprised that Trump doesn’t see this point, because (to his credit) he often looks at the stock market reaction to policy announcements. US stocks are up sharply today, a pattern I’ve seen over and over again.
Trump seems to want a tighter money policy in Europe. Here’s a headline from 2015, showing how global markets reacted to the sort of policy that Trump seems to favor:
Global stocks slammed by ECB; euro jumps most since 2009
Global stocks “slammed” by a contractionary ECB policy announcement. When I first read Trump’s comments on the ECB, I was reminded of this old joke from the Soviet Union:
A genie says to a peasant, “I will grant you any wish, but remember that I will give your neighbor twice what I give you.” The peasant thinks for a while and responds, “Poke out one of my eyes.”