Germany: the biggest winner in currency war

Today's FT article gave me some food for thought on a currency war now under way. A similar article from Bloomberg,

Germany has faced criticism this year, notably from France, of its large trade surplus, along with calls to increase demand at home to help rebalance wide differences in capital flows across Europe.

Bruederle was keen to reject that. Recent figures show that "the stronger growth component is now the domestic market, and with that the criticism of German strategy or activities is refuted by reality," he said.

Germany is, as I noted before, the biggest beneficiary of weak euro caused by economic crisis in PIIGS this year. Its export has almost recovered the same level just before the Lehman crisis hit the world in late 2008.

Nobody would doubt the importance of weak euro to help lift German export, as is clearly shown in the graph above. Now, you would be surprised to know how much German currency has depreciated this year.

Germany has been the biggest winner in a currency war thus far, benefiting from the effective exchange rate lower than not only G7 countries but also crisis-hit PIIGS. It's no wonder that the government raised its economic growth forecast for the largest economy in Europe.

The German government said the economy will grow this year at the fastest pace since 1991, raising its forecast as exports to China and other Asian countries boom and consumer spending revives.

Europe's largest economy will probably grow by 3.4 percent in 2010 and by 1.8 percent next year, the Economy Ministry said in a report today. The government previously forecast an expansion of 1.4 percent and 1.6 percent, respectively.

Foreign demand for cars and machines dragged Germany out recession in the second quarter of last year. Exports, which made up 41 percent of the country's gross domestic product in 2009, will grow 16 percent this year, the BGA exporters group said on Oct. 19. Sales of goods and services to countries outside Europe will grow 25 percent, the exporters said.

So far this year, according to BIS, China's currency has appreciated by 4% in real terms. Can Germany blame China on its currency policy?