The FT is reporting that US President Donald Trump sees Germany as a ‘currency manipulator’ of sorts, a view bound to have negative consequences for bilateral relations. What’s more, according to the Financial Times, Trump’s top trade advisor, Peter Navarro, has accused Germany of using a “grossly undervalued” euro to “exploit” the United States as well as Germany’s own EU monetary union partners. This makes three countries in Trump’s sights: China, Mexico and, now, Germany.

First, here’s exactly what the FT is reporting:

Germany is using a “grossly undervalued” euro to “exploit” the US and its EU partners, Donald Trump’s top trade adviser has said in comments that are likely to trigger alarm in Europe’s largest economy.

Peter Navarro, the head of Mr Trump’s new National Trade Council, told the Financial Times the euro was like an “implicit Deutsche Mark” whose low valuation gave Germany an advantage over its main trading partners. His views suggest the new administration is focusing on currency as part of its hard-charging approach on trade ties.

In a departure from past US policy, Mr Navarro also called Germany one of the main hurdles to an American trade deal with the EU and declared talks with the bloc over a US-EU agreement, known as the Transatlantic Trade and Investment Partnership, dead.

That’s an extremely aggressive view of the situation – and quite frankly, it’s totally wrong! Here’s why.

For years now, the German press, German banks, and even German monetary policy officials have all been singing from the same hymn book – the one that preaches tighter monetary policy and lower inflation. This was true even at the peak of the sovereign debt crisis six years ago. And it is well-documented.

For example, back in 2011, then ECB chief economist Jürgen Stark resigned in protest over the ECB’s quantitative easing monetary policy after Bundesbank President Axel Weber resigned for the very same reasons. Stark gave an interview with the Frankfurter Allgemeine Zeitung outlining his views. I translated them into English at the time:

“It is not so much that bond purchases will lead to inflation at this particular moment. The ECB regularly draws down the liquidity again; it later soaks up the money spent. What is important and problematic is that the interest rate on government bonds is affected by the purchase of bonds and thus has a fiscal effect. We influence the conditions under which governments can borrow. This is absolutely not our job.

[…]

…The concept of solving all the world’s problem with additional liquidity is wrong-headed. It may help in the short term; medium term, however, it leads to market distortions and higher inflation. But it is precisely American think tanks which encourage the public and policy makers to higher inflation rates. This viewpoint is slowly penetrating Europe as well. The recommendation that the ECB should allow instead two percent inflation, four or five percent, I think is fundamentally wrong. Such a price development can be very difficult to reel in.”

Stark was saying two things. First, QE, was the wrong approach for the ECB because it was a quasi-fiscal operation and it distorted interest rates in the government bond market. Second, he was saying that he was concerned that loose policy globally would lead to inflation. No one who read his comments would call him or his German colleagues a ‘currency manipulator’.

Instead, what one would say is that the Germans are ‘benefitting’ from a one-size-fits-all monetary policy, set for the whole of the euro area, parts of which are flirting with outright deflation. It is true that the euro is weaker than an independent Deutsche Mark would be. But, of course, the euro was also weaker than an independent Irish Punt or Spanish Peseta would have been in the mid 2000s. This is the reality of any common currency area. Policy is set for the area as a whole, not individual states.

If you look at what the Germans are saying today, it’s exactly the same. In fact, because inflation in Germany came out just yesterday and showed prices rising in excess of the ECB’s 2% target, there was a huge outpouring of scorn for the ECB in Germany. The mantra there is that the ECB is robbing German savers of money by creating conditions in which savings rates are well below the rate of inflation. German savers are getting zero interest in their savings account, a principal traditional way by which Germans have accumulated wealth. Meanwhile, prices go up and German savings is losing value in real terms. That’s what’s being said in Germany. And by the way, this is the kind of thing that is helping the AfD party win voters, particularly in the east.

Does any of this matter though? I don’t think so.

What matters is perception. And the perception in the Trump Administration is that Europe – and by extension Germany – has a weak currency. The fact that Germany just overtook the Chinese as the country with the largest trade surplus in the entire world is seen as prima facie evidence that the Germans are exploiting the euro to win trade. We’re talking about an enormous 8.6% current account surplus – $297 billion. The Germans can say this is as a result of market forces all they want. Trump is going to see the trade surplus as resulting from a directed and unfair policy.

Meanwhile, EU and German politicians are taking Trump to task for a bevy of other things Trump has said and done, with the Germans being the most outspoken. Yesterday, German Chancellor Angela Merkel even addressed the refugee ban during an unrelated press conference with Ukrainian President Petro Poroshenko. In unprompted remarks to the assembled press, she justifiably said:

“The essential and also resolute fight against terrorism in no way justifies general suspicion against people of a specific faith, in this case people of the Muslim faith or people of a certain background.” 

My view: There is increasing personal animosity between Trump and Merkel, between Trump and the German government and between Trump and the EU. I think Germany will be the biggest loser in 2017 politically, as a result, because Trump will look to shift away from Germany as a partner. The latest comments from Navarro make clear, however, that a trade spat between Germany and the US could also be looming. We should watch German-US bilateral relations closely because they will have a huge impact on currencies and trade negotiations.