German Chancellor Friedrich Merz reignited the debate over China's currency policy during a speech at the opening ceremony of the Adenauer School of Government at the University of Cologne on July 13. He argued that no matter how innovative or economically advanced the European Union may be, it cannot compete effectively if its trading partners are "deliberately manipulating their currencies." This is not the first time Merz has criticized the yuan. Following the EU summit in Brussels last month, he claimed the Chinese currency was undervalued by 30% and urged the EU to adopt a tougher stance toward China.

Merz Revives the Plaza Accord Comparison

In both of his recent remarks, Merz referenced the 1985 Plaza Accord. In September 1985, finance ministers and central bank governors from the United States, Japan, West Germany, France, and the United Kingdom signed the agreement at New York's Plaza Hotel, coordinating intervention in foreign exchange markets to weaken the U.S. dollar. Over the following three years, the Japanese yen appreciated by more than 100% against the dollar, contributing to Japan's asset bubble and the decades-long economic stagnation that followed its collapse.

However, this comparison is problematic on two fronts. First, the Plaza Accord was a coordinated multilateral agreement among five major economies, whereas Merz's proposal effectively amounts to unilateral pressure from the EU on China to adjust its exchange rate. This differs fundamentally from the cooperative framework established in 1985. Second, the long-term consequences of the Plaza Accord are widely regarded as a cautionary tale. Using it as a template to resolve modern trade imbalances is therefore difficult to justify.

European Central Bank President Christine Lagarde has also expressed a different view. She recently stated that attempting to replicate the Plaza Accord in dealing with China "may no longer be appropriate," adding that "today's world is fundamentally different from the era in which the Plaza Accord was signed."

Merz's repeated focus on the yuan comes against the backdrop of the European Union's substantial trade deficit with China. Data show that the EU's trade deficit with China reached approximately €360 billion in 2025, with Germany alone accounting for roughly €90 billion. As Germany faces mounting economic growth challenges, the trade deficit has become an increasingly politicized issue. In his speech, Merz said Europe faces a "very significant" challenge in defining its approach toward China, adding that "we need to reduce our dependence on China." However, attributing the trade imbalance primarily to exchange rates overlooks two fundamental realities.

The first is the structure of trade itself. China's exports to the EU are dominated by products such as machinery, electrical equipment, textiles, and furniture. The competitiveness of these industries stems largely from China's integrated supply chains and economies of scale rather than exchange rate advantages. China's Ministry of Foreign Affairs has previously emphasized that the competitiveness of Chinese products is driven not by subsidies, but by sustained investment in research and development, robust market competition, and a comprehensive industrial supply chain.

The second is the direction of capital flows. Data indicate that German investment in China increased by more than 55% year-on-year in 2025, while investment from Switzerland rose 66.8% and the United Kingdom recorded growth of 15.9%. European companies continue to commit significant capital to expanding their presence in the Chinese market. If the yuan were indeed "substantially undervalued," it raises the question of why these European businesses would continue increasing investment in a market they believe operates under an artificially suppressed currency.

Divisions Within the European Union

Merz's hardline position is not universally shared within the European Union. Beyond Lagarde's clear statement that a Plaza Accord-style approach is "not appropriate," the EU's broader policy direction also reflects internal contradictions. According to Bloomberg, European leaders have instructed the European Commission to continue engaging China through dialogue while simultaneously strengthening the bloc's trade defense mechanisms. The dual strategy of "maintaining dialogue" while "reinforcing trade defenses" highlights an inherent tension between negotiation and confrontation.

Chinese Foreign Ministry spokesperson Mao Ning has previously responded by stating that concepts such as "de-risking," "reducing dependence," and even calls for "trade balance" amount to protectionism in practice. She argued that such measures would ultimately harm European consumers, raise costs for businesses, and weaken the long-term competitiveness of European industries.