Brexit warning as ‘undervalued’ euro tipped to undermine UK trade

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In November 2019, the Ministry of Defence awarded a £2.3billion contract to the German consortium ARTEC to produce around 520 Boxer armoured vehicles to be delivered in 2023. A year later, ARTEC signed two separate subcontracts with German-controlled companies RBS and WFEL for the local production and assembly of these vehicles. In a recent report, Dr David Blake, a Professor of Pension Economics and Director of the Pensions Institute at Cass Business School, London, argued it is not surprising Germany was awarded the contract.

He explained: “It is not just because of its superior engineering skills or more efficient manufacturing processes.

“A key reason is the value of the euro.

“The euro is a structurally undervalued currency.”

According to Dr Blake, there are several reasons for this.

Firstly, the economist noted, the euro is an “incomplete” currency and unlike every other currency, there is no single sovereign standing behind it.

This is very different from what happens in fully sovereign states, like the UK and US, where their central banks and Treasury departments stand fully behind the bonds issued by their governments and can, if necessary, print enough money to pay off their national debts.

Secondly, Dr Blake added, it is an artificially-constructed currency, as a consequence of the fixed rates used in 1999 to convert the domestic currencies of eurozone members into euros.

This affected not only the internal exchange rates between the EZ members, but also the international value of the euro.

Dr Blake added: “The net result has been a downward bias in the international trading value of the euro, with the inefficient southern member states dragging down the value of the euro relative to what it would be if all member states were as efficient as Germany and the Netherlands.

“Only about a third of the value of the euro is represented by the old Deutsche Mark.

“This undervaluation has persisted since the euro was introduced.”

As a result, Dr Blake insisted, the euro is undervalued against sterling on what economists call a purchasing power parity (PPP) basis.

He concluded in his report for Briefings for Britain: “I estimate that the undervaluation is as high as 20 percent.

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“This explains why the UK has a £97bn trade deficit in goods with the EU.”

In 2017, Peter Navarro, the top trade adviser of former US President Donald Trump put forward similar claims.

He accused Berlin of using a “grossly undervalued” euro to “exploit” the US and its EU partners.

Mr Navarro told the Financial Times: “A big obstacle to viewing The Transatlantic Trade and Investment Partnership (TTIP) as a bilateral deal is Germany, which continues to exploit other countries in the EU as well as the US with an ‘implicit Deutsche Mark’ that is grossly undervalued.

“The German structural imbalance in trade with the rest of the EU and the US underscores the economic heterogeneity [diversity] within the EU — ergo, this is a multilateral deal in bilateral dress.”

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Germany’s large trade surplus with the US and much of the eurozone was a point of friction in Brussels and Washington for several years, with both capitals calling for Berlin to stimulate domestic demand to rebalance its economy.

Critics have long argued Berlin has disproportionately benefited from weakness in the rest of the eurozone, which has held the euro lower than other regional currencies, like the Swiss Franc, making German exports cheaper in overseas markets like China and the US.

German Chancellor Angela Merkel responded to Mr Navarro’s allegations, saying Germany could not influence the euro.

At a press conference in Stockholm with Sweden’s Prime Minister Stefan Lofven, Mrs Merkel said Germany has always “supported an independent European Central Bank”.

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