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Capital Markets

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Categorized | Currencies, Economy

Germany rebuffs US Treasury criticism

Posted on October 31, 2013

Germany has struck back at the US Treasury after it became the target of an unusual swipe in a report blaming the eurozone’s biggest economy for giving a deflationary bias to the euro area and the world economy.

Although the US Treasury has criticised German policy before, in its new semi-annual currency report it elevated the comments to a “key finding” alongside China’s undervaluation of the renminbi and Japan’s monetary stimulus.

    The German federal finance ministry responded that its current account surplus was “no cause for concern, neither for Germany, nor for the eurozone, or the global economy”.

    “There are no imbalances in Germany that need correction,” a finance ministry spokesman said. “On the contrary, the innovative German economy contributes significantly to global growth through exports and the import of components for finished products.”

    The spokesman added that Germany had “robust” wage growth and that the economy had shifted towards domestic demand.

    The US decision to name Germany directly in the report highlights deep frustration with the eurozone’s largest economy among international policy makers who find it hard to see how peripheral countries such as Greece can grow if Germany will not create demand for their exports.

    “Germany has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany’s nominal current account surplus was larger than that of China,” the Treasury report said.

    “Germany’s anaemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment.”

    Although eurozone policy makers have pointed to signs of recovery in Spain and elsewhere, US policy makers remain deeply sceptical that the currency area’s problems are solved, and fearful of another crisis that would hurt their own growth.

    However, Germany has resisted policies to encourage faster wage growth or running a larger budget deficit in order to stimulate demand.

    The currency report also sounded a renewed note of warning about China’s currency, saying that the renminbi had appreciated little in recent months, and China had resumed intervention.

    “The evidence that China has resumed large-scale purchases of foreign exchange this year, despite having accumulated $3.6tn in reserves . . . is suggestive of actions that are impeding market determination and a currency that is significantly undervalued,” the Treasury report says.

    But it stopped short of officially naming China a currency manipulator. If the Treasury names any country a manipulator then, under the statute that requires the report, it must immediately open negotiations with the country to adjust the exchange rate.

    In recent years, the Treasury has preferred to encourage China to revalue the renminbi, and argued that it has made progress towards doing so.