Remember how this eurozone mess largely boils down to a balance of payments problem? The peripherals have current account deficits and the northern countries have surpluses. As the eurozone is a semi-closed/unified economy, it is difficult for the peripherals to pull out of that situation while the northern countries remain determined to be in surplus.
A paper from Deutsche Bank’s Gilles Moec points out some contradictions in this argument — but ultimately, we think, validates it.
First, he shows that the eurozone peripherals have, in fact, been reducing their balance of payments deficits — by about half, over the past couple of years:
Alright then, but why aren’t Finland, Austria, The Netherlands, and Germany rebalancing, too?
Look closely at the graph. Or, read this:
The rebalancing of European current accounts imbalances across member states is underway, but is not taking the form of a general convergence towards neutral balances. Peripherals are making good progress while no major change is occurring in surplus countries. The two “victims” are France and Italy, where current account deficits – albeit still more manageable than in most peripherals – continue to deteriorate.
How did this all come about?
For one thing, Moec says, exhortations that the ‘FANG’ countries should contribute to rebalancing by importing more are misguided, because they are importing more — between Q4 2007 and Q3 2011 (the last quarter for which comparable data is available), Moec says, Germany had the strongest growth in imports of any eurozone country. German imports grew 13.9 per cent in that period. The Netherlands, another surplus country, was number 2 with almost 5 per cent growth. France, by contrast, is only 0.3 per cent higher.
The problem for the peripherals, is that Germany et al’s rising imports do not come from the eurozone. In fact, the share of German imports that come from other eurozone countries fell quite a lot between 2005 and 2010:
Okay, then. So what’s a peripheral to do?
It’s rather instructive to examine what Spain has experienced – namely, a big rise in exports:
In Spain and Portugal, the fall in imports went faster than the improvement in exports1., but exports still grew quicker there than in the Euro area on average, and very significantly so in Spain. Maybe surprisingly, given the country’s strong competitiveness, Irish exports did not outpace the Euro area. This may be attributable to the non-cyclical nature of these exports (pharmaceuticals for instance). While Ireland was somewhat protected against the crash decline in global demand in 2008/2009, external traction is now providing little support. Ireland’s remarkable turnaround in its current account position is overwhelmingly attributable to a complete collapse in imports, itself the result of a massive contraction in domestic demand, which in Q3 2011 was lower than at the end of 2007 by a quarter.
Whew. So, competitiveness to the rescue, then? Not if you’re just talking about unit labour costs:
Not much correlation there — again, compare Spain and Ireland. Moec suggests other factors such as product range, quality, and adaptiveness to consumer demands also need to be considered, along with unit labour costs.
Yet another factor concerns which export markets one targets. Spain seems to have fared relatively well on this front for two reasons.
First, Spain’s exports have maintained their share of Germany’s imports:
Second, Spanish exports have diversified away from the eurozone:
The example of Spain is quite telling. It normally displays a very “Eurocentric” export matrix. In 2007, the EU 27 absorbed 69.4% of its total exports of goods. The ratio has fallen to 65.3% in 2011, but more importantly, non European markets explained 57% of the total growth in Spanish exports of goods between 2007 and 2011
Something a Greek exporter may wish to consider.
Full note in the usual place.