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An undervalued Euro harms our trade

pound euro 1
Written by David Blake

Professor Blake argues that an undervalued euro and an overvalued pound both undermine UK trade. A new approach is needed to restoring UK competitiveness and part of this should be a case at the World Trade Organisation to reverse EU dumping.

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In November 2019, the UK Ministry of Defence awarded a £2.3bn contract to the German consortium ARTEC to produce around 520 Boxer armoured vehicles to be delivered in 2023.  In November 2020, ARTEC signed two separate subcontracts with German-controlled companies RBSL[1] and WFEL for the local production and assembly of these vehicles.[2] There are several surprising features about this contract.

First, it was awarded to a German-controlled company just a month before the UK left the European Union.  Second, the contract was not put out to competitive tender.[3]  Third, the contract requires 60% of the manufacturing to be done in the UK and it appears that ARTEC is struggling to find UK businesses with the appropriate capabilities.

In March 2021, RBSL was awarded a £750m contract to upgrade 150 Challenger tanks with new turrets and more accurate guns with computerised targeting.[4]

Sharp decline in UK manufacturing since the introduction of the euro

These contracts sum up everything that is wrong about the decline in British manufacturing capacity over the last 30 years.[5] Figure 1 shows that manufacturing has been declining as a share of Gross Domestic Product (GDP). It was above 16% in 1990, fell sharply in the 2000s, before stabilising at around 9% after 2010. Our manufacturing capability is now so poor that we are not able to produce the armoured vehicles and tanks needed for our own defence.

Figure 1: Manufacturing, United Kingdom, 1990 – 2019 (% of GDP)

An undervalued Euro harms our trade graph 1Source:

The euro is a structurally undervalued currency

What is not surprising, however, is why Germany got the contract. And 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. There are several reasons for this.[6]

Firstly, the euro is an ‘incomplete’ currency. Unlike every other currency, there is no single sovereign standing behind it. Each member state stands behind the euro only to a certain percentage and collectively the member states do not share joint-and-several liability for each other’s national debts. This makes them ‘sub-sovereign’ members of the Eurozone (EZ).[7]

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. The European Central Bank does not have the legal power to do this.  If the financial markets were fully aware of this, there would be a ‘sub-sovereign’ discount in the trading price of the euro.

Secondly, it is an artificially-constructed currency, as a consequence of the fixed rates used in 1999 to convert the domestic currencies of EZ members into euros. This affected not only the internal exchange rates between the EZ members, but also the international value of the euro.

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 Deutschmark. This undervaluation has persisted since the euro was introduced.

The euro’s undervaluation explains why the UK has a trade deficit with the EU and why UK manufacturing has declined

As a result, the euro is undervalued against sterling on what economists call a purchasing power parity (PPP) basis. I estimate that the undervaluation is as high as 20%.[8]  This explains why the UK has a £97bn trade deficit in goods with the EU.[9] Figure 2 shows that the UK has a goods trade deficit with 16 EU member states. Germany leads the list: our deficit with Germany is £29bn. Most of this is explained by automobile sales to the UK.  But part of it will be due to the Boxer and Challenger contracts.

Figure 2: UK-EU trade deficits in goods, 2019 (£ billions)

An undervalued Euro harms our trade graph 2Source: House of Commons Library: Research briefing 10 Nov 2020, ‘Statistics on UK-EU Trade’

The UK has almost always run a trade deficit with the EU, but Figure 3 shows that prior to 1999, the size of the deficit was relatively small at around 0.25% of GDP. But since then, the deficit has ballooned to nearly 4% of GDP. The Figure shows a strong downward trend and that trend shows no sign of ending. The Figure conclusively demonstrates that the euro is significantly undervalued. This undervaluation explains not only the UK’s trade deficit with the EU, it also explains the sharp decline in the share of manufacturing in UK GDP in Figure 1.

By contrast, Figure 3 shows that the UK has a trade surplus with non-EU states and that surplus is on a strong upward trend. And most of the trade with non-EU states is conducted on World Trade Organisation (WTO) terms and hence involves tariffs.

Figure 3: Balance of trade with EU and non-EU countries, 1999-2019, goods and services (% of GDP)

Research briefing graph 3Source: House of Commons Library: Research briefing 10 Nov 2020, ‘Statistics on UK-EU Trade’

But the pound is also too strong

This might suggest that there are no distortions in the value of sterling. But this is not the case. Sterling is overvalued because of what is happening on the UK capital account. There is a high demand for sterling coming from (1) foreign direct investors, including portfolio and real estate investors, buying UK equities, government bonds and property (there are few other politically stable countries that allow such unrestricted access) and (2) the repatriation of dividends, etc, from the UK’s relatively large holding of overseas investments, in particular, by institutional investors, such as pension funds.[10] Both factors have helped to push up the value of sterling above its PPP level.[11]

So it is fair to say that the declining manufacturing share in Figure 1 is due in part to the overvaluation of sterling which has made it very difficult for UK manufacturers to compete against much cheaper components from China, for example. John Mann, a UK manufacturer, argues that: ‘The pound is … too strong … to make it worth siting much new light manufacturing activity in the UK rather than in China or Germany. This is why we need to move to having a still lower pound – say parity with the dollar – which is what industry and the regions need if we are ever going to compete internationally on manufacturing. Then we would have export and investment led growth instead of import and debt led stagnation’. [12]

So UK exporters face the double whammy of an undervalued euro and an overvalued pound.[13]

The TCA locks in the structural trade deficit

The Trade and Cooperation Agreement (TCA)[14] between the UK and EU which came into effect on 1 January 2021 will only entrench the UK’s structural trade deficit with the EU. The undervalued euro acts as a trade subsidy to EZ firms, giving them an unfair advantage over global competitors and in particular the UK. The EU likes to talk about a ‘level playing field’, but the structural undervaluation of the euro heavily tilts the playing field in the EU’s direction. We have not been playing on a level playing field with the EU since 1999.[15]

We can and must act now to protect UK interests

This cannot be permitted to continue and the solutions are clear. We can and must act now to protect the UK from the EZ’s unfair competitive advantage. Especially important is the Trade Bill[16] ‒ going through its final stages in Parliament ‒ and the introduction of the Trade Remedies Authority (TRA) which will allow the UK to conduct its own dumping and subsidies investigations.

The TRA’s first task should be to take a very close look at the structurally undervalued euro. This potentially violates two areas of international law: dumping and subsidies.

First, Article VI of the General Agreement on Tariffs and Trade (GATT) points out that multiple currency practices can ‘constitute a form of dumping by means of a partial depreciation of a country’s currency’, thereby benefitting EZ exporters unfairly. The anti-dumping remedy in this case is the imposition by the importing state of an additional duty on the dumped goods.

Second, artificially low currencies could amount to an export subsidy and therefore breach the WTO’s Agreement on Subsidies and Countervailing Measures (SCM).

To reiterate, the EU is dumping its goods onto the UK market by taking advantage of its structurally undervalued currency. This is a form of export subsidy arising from what is in effect a very subtle from of currency manipulation. This is illegal under international law.

Had the euro been correctly valued, then EZ exports to the UK in 2018 would have been lower by between £67.2bn and £88.4bn.[17] The UK would therefore be entitled to impose an annual anti-dumping duty on the EZ in that range. If it did this, the Boxer and Challenger deals would not be so attractive financially to Germany and UK companies would have been able to compete for these contracts on a more level playing field.

European Commission President Ursula von der Leyen supports ‘a new partnership with zero tariffs, zero quotas, zero dumping’ with the UK.  Yet her own country is one of the world’s biggest dumpers of goods onto world markets. And this is a practice that Germany has followed consistently since the 1870s: it is ‘the standard practice of …German kartells to engage in large-scale dumping as a deliberate export strategy’.[18]

We should note that China ‒ which itself has a systemically undervalued currency as a result of currency manipulation ‒ has no qualms about imposing anti-dumping duties of between 107%-212% on what it calls ‘subsidised’ Australian wine.[19] Yet even in the case of China, the way the euro was constructed greatly favours German exporters and this is reflected in the size of German export sales to China, as Figure 4 shows.

Figure 4: Goods exports to China, 2020 (€bn)

Research briefing graph 4Source: Eurostat, Financial Times

We should also note that the EU itself is now taking measures to prevent unfair economic competition from China and other countries, including limiting the ability of companies supported by foreign subsidies to buy EU businesses or take part in public tenders. It is also planning to reduce the EU’s dependency on Chinese and other foreign suppliers in six strategic areas, raw materials, batteries, active pharmaceutical ingredients, hydrogen, semiconductors and cloud and edge technologies.[20]

What we have learned from the trade negotiations with Michel Barnier is that the EU is ruthless in defending its own interests and exploiting our weaknesses. For example, we had to trade off fishing for energy security, such is our dependence on electricity from the EU.[21]  The EU has already threatened three times to stop the electricity flowing through the interconnectors between France and the UK,[22] and France is threatening to do the same to Jersey if the Channel Island does not permit  French boats to fish in its waters.[23] Barnier told the French Senate that the fishing deal was positive for the EU because the EU fishes some €650m annually in UK waters, while the UK fishes €850m in its own waters and €150m in EU waters.[24] This means that the UK is paying €500m a year in the hope, but without any guarantee, that the EU will not block electricity flows from the EU.  We, by contrast, have a Prime Minister who just wants to be seen as ‘Mr Nice Guy’.

The EU will always behave like this.  It was set up specifically to give absolute power to unelected officials at the European Commission who would always be supported by the unelected European Court of Justice.  The European parliament provides only a veneer of democracy since it can only rubber stamp legislation proposed by the Commission and is unable, in practice, to remove the Commission, however incompetent it is ‒ as the Commission’s disastrous covid vaccine procurement exercise shows.[25] The EU is incapable of being reformed and, further, its leaders do not want reform, they want more centralisation of power and authority. The reason for this lies in the way in which the EU and its predecessor institution, the European Economic Community, was designed and introduced.  See my ‘Striking Similarities:  The Origins of the European Economic Community’.[26]

It is time for the government to wake up to this reality and ensure that we have sufficient manufacturing capabilities to give us proper defence and energy security and resilience in the future ‒ including mini-nukes, which produce cheaper and greener nuclear power, using a technology where Rolls-Royce is a world leader.[27]

We are beginning to see this with the announcement of a new naval shipbuilding strategy, which has widened the criteria for ships that have to be built in the UK.[28] We used to be world leaders in defence equipment manufacturing. John Allan, chair of the Covid Recovery Commission, argues that Brexit gives the government the opportunity to build up cutting-edge industries and create new export opportunities, and to reduce its reliance on foreign supply chains[29]– as illustrated by the PPE (personal protective equipment) catastrophe at the start of the covid pandemic.[30]

In his new book on the Brexit negotiations, The Great Illusion, Michel Barnier dismisses the notion of ‘Global Britain: I do wonder what, until now, has prevented the UK from becoming “Global Britain”, other than its own lack of competitiveness. Germany has become “Global Germany” while being firmly inside the EU and the eurozone’.[31]

And we know precisely that this is due in large part to an undervalued euro.  The UK government needs to introduce measures to counteract the structural undervaluation of the euro which has done so much damage to British manufacturing capability over the last 20 years.  These measures in the form of anti-dumping duties need to be introduced now.

A final point to note is that in an interview in the Financial Times in 2017, Peter Navarro, then US President Donald Trump’s trade adviser,  accused Germany of using a ‘grossly undervalued’ euro to ‘exploit’ both the US and its own EU partners: ‘A big obstacle to viewing TTIP [the ultimately aborted US-EU free trade agreement, the Transatlantic Trade and Investment Partnership, that was being negotiated at the time] 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 within the EU ‒ ergo, this is a multilateral deal in bilateral dress’.





[5] There is a different point to be made about whether it is sensible to be spending money on armoured vehicles and tanks when the future of defence lies in drones, hypersonic missiles, and fast light vehicles.

[6] Managing Euro Risk;

[7] The Eurozone comprises 19 out of 27 member states of the EU.

[8] David Blake (2020) The UK Is the Eurozone’s Dumping Ground; and


[10] See, e.g., Ashoka Mody (2016) Don’t believe what you’ve read: the plummeting pound sterling is good news for Britain, The Independent, 10 October;

[11] Sterling did fall below its PPP level following the Brexit Referendum in 2016. However, it remains overvalued relative to the euro.

[12] John Mann (2021), A post-Brexit economy needs a lower sterling exchange rate, Briefings for Britain, 4 April,

[13] It would, of course, be difficult at the present time for the government to engage in an expansionary monetary policy intended to reduce sterling’s international value without the risk of increasing inflation.




[17] David Blake (2020) The UK Is the Eurozone’s Dumping Ground; and

[18] See: Thomas R. Howell and Dewey Ballantine (1997) ‘Dumping: Still a Problem’ in Charles W. Wessner (Editor) International Trade in International Friction and Cooperation in High-Technology Development and Trade: Papers and Proceedings, Washington DC: National Academy Press; On p332, it is stated that ‘It was the standard practice of …German kartells to engage in large-scale dumping as a deliberate export strategy’, citing Witness No. 11, Report of the Tariff Commission, Vol. I (London: P.S. King & Son, 1904), pars. 795, 806.








[26] David Blake (2021) Striking Similarities:  The Origins of the European Economic Community;






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About the author

David Blake

Professor David Blake is at Cass Business School