Trump's Attack On Draghi And The Euro: A Clueless Gesture

President Trump pulled the trigger on a tweet, again. The targets were Mario Draghi, the President of the European Central Bank (ECB), and the euro. The President claims that Draghi and the ECB are manipulating the euro to weaken it against the greenback. According to the President, this is “making it unfairly easier for them to compete against the USA.” And what’s more, Trump claims that “They have been getting away with this for years, along with China and others.”

The idea that weak currencies give a country’s businesses and industries a competitive edge against their counterparts located in countries with stronger currencies is widely held by businessmen—like President Trump. But, when it comes to international economics and currency exchange rates, most businessmen are clueless. President Trump is not alone.

Instead of relying on fantastic theories spun by the President and other businessmen, let’s take a look at the evidence and the facts.

Switzerland has the world’s fourth most competitive economy (the United States holds down the top spot), according to the World Economic Forum’s Global Competitiveness Report 2018. Switzerland didn’t reach the top five by devaluing the Swiss franc. Indeed, since the Bretton Woods system of pegged exchange rates collapsed in 1973 and exchange rates became “flexible,” the Swissie has been the world’s strongest currency. The chart below shows the appreciation of the franc against the greenback.


If we adjust the exchange rate for inflation differentials between Switzerland and the U.S. to determine a real exchange rate, the picture is the same. The Swissie has appreciated against the greenback (see the chart below).


Just why does the evidence from Switzerland fly in the face of President Trump’s wrongheaded ideas? For those who study competitiveness and trade, the answer is clear. When businesses anticipate a “strong” domestic currency, they never become hooked on the phony notion that a “weak” currency will bail them out and somehow make them more competitive. No. Instead, they focus on their knitting and the quest for increasing the productivity of their businesses. Faced with the expectation of a strong currency, they know that the name of the “competitiveness game” is productivity.

Contrary to President Trump’s tweets, an ever-appreciating currency is a sign of health and enhanced competitiveness. The evidence from Switzerland supports this, and so do data from a more broadly-based sample of countries.

I recall the first time I met John “Jack” Tatom. It was in Zurich. At that time, Jack was the executive director and head of country research and limit control at Union Bank of Switzerland. Now, he is a fellow at the Johns Hopkins Institute for Applied Economics, Global Health and the Study of Business Enterprise, a research institute I founded with Prof. Louis Galambos in 1995.

One of the topics that Jack and I focused on over our lunch in Zurich was the widely held notion that devaluations are an economic elixir. He had just finished analyzing the relationship between average rates of currency depreciation against the U.S. dollar and real GDP growth for 42 countries in the 1992-95 period. These countries included the four Asian Tigers and selected emerging countries in Asia, Latin America, Eastern Europe, Southern Europe, the Middle East, and Sub-Saharan Africa.

As the chart below shows, the evidence fails to support the idea that currency depreciations boost growth. Indeed, Tatum found just the opposite: currency appreciations are associated with stronger growth.


The data speak loudly. President Trump, are you listening?


Past Blogs

Trump On Tariffs: Clueless

June 27, 2019

President Trump doesn’t like U.S. trade deficits. He also doesn’t like migrants flowing into the U.S. from south of the border. His tariffs and tariff threats are slowing trade and world economic growth. And this will, in turn, increase the migrant flows into the United States. After all, as foreign economic activity slows, and more foreigners are either thrown out of work or find their incomes drying up, they will be motivated to migrate. Trump remains clueless as to why tariffs fuel migration.

more »

Malaysia's Mahathir Mohamed Goes For Gold

June 12, 2019

Last week in Tokyo, while addressing the 25th International Conference on the Future of Asia (Nikkei Conference), Malaysia’s Prime Minister, the venerable Mahathir Mohamad, went for gold. He brought the audience to attention by proposing an Asian currency linked to gold. Dr. Mahathir argued that such a currency would promote regional stability, while avoiding the so-called “dollar trap” (read: dollar dependency). This time around, the ninety-three-year-old Mahathir is onto something—something that would deliver its advertised benefits.

more »

Africa, Flying Blind And Miserable

June 05, 2019

Each year, I construct a Misery Index. The idea of such an index to measure economic misery was introduced by economist Art Okun in the 1960s as a way to provide President Lyndon Johnson with an easily digestible snapshot of the economy. When we dive down into the depths of misery (read: high scores on the Misery Index), we hit Venezuela, 2018’s most miserable country. It’s score was an amazing 1,746,439.1. Hyperinflating Venezuela was followed by Argentina, another Latin America country that is crisis-prone. To list but a few of Argentina’s currency crises: 1876, 1890, 1914, 1930, 1952, 1958, 1967, 1975, 1985, 1989, 2001, and 2018. You would think the Argentines would wise up and dump the peso, replacing it with the greenback. But, this has yet to happen. That brings me to the third most miserable country, Iran. It also brings me to the countries in the country group—the Middle East and North Africa (MENA)—that Iran belongs to.

more »

The Three M's: Milosevic, Mugabe, And Maduro

May 29, 2019

What do Slobodan Milosevic, Robert Mugabe, and Nicolás Maduro have in common? Other than being leaders who kept the Communist Manifesto at their bedside, all three ushered in devastating hyperinflations. Hyperinflations are rare. They have only occurred when the supply of money has been governed by discretionary paper money standards. No hyperinflation has ever been recorded when money has been commodity-based or when paper money has been convertible into a commodity. Since 1900 there have been 57 episodes of hyperinflation. And, five of those episodes can be claimed by Yugoslavia, Zimbabwe, and Venezuela.

more »

Turkey's Inflationary Woes

May 23, 2019

Today, Turkey’s annual inflation rate is 49 percent. How do I measure elevated inflation? The most important price in an economy is the exchange rate between the local currency – in this case, the lira – and the world’s reserve currency, the U.S. dollar. As long as there is an active free market for currency and the data are available, changes in the exchange rate can be reliably transformed into accurate measurements of countrywide inflation rates. The economic principle of purchasing power parity (PPP) allows for this transformation. The application of PPP to measure elevated inflation rates is both simple and very accurate.

more »