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The Latest Eurozone Trade Data is a Mixed Blessing

Updated on August 27, 2012

A weak Euro keeps the Eurozone afloat

A weak Euro is good for trade
A weak Euro is good for trade | Source

The weak Euro drives the Eurozone Trade Surplus

Financial markets have obsessed with the weak Euro this summer. The flipside of this crisis has been a blessing for the real economy of Europe. The weak Euro has led to a record trade surplus; which has blunted the economic headwinds. Far from being a symptom of the crisis, the weak Euro is actually a welcome policy tool; to keep economies from weakening further and exacerbating the debt problem.

Since Europe has a trade surplus, it has the financial resources to address its debts. This is an oversimplifcation at this point in time however; because the Eurozone cannot be looked at as one economy. It is this fragmentation that is the source of the current problem; and the clue to its resolution.

The Trade Balance Breakdown

The Trade Balance is unbalanced
The Trade Balance is unbalanced | Source

Breaking Down the Trade Balance

When the pattern of trade between the Eurozone and its trade partners is analysed; a clearer understanding of the problem can be made. The Eurozone roughly trades about fifty percent within its borders. Approximately twenty five percent of trade comes from the Anglo-Saxon nations of Britain and the USA. The rest of the World accounts for the remaining twenty five percent of the trade flows.

The clearest observation to be made is that the Eurozone does not have enough export exposure to the growing emerging economies. The Eurozone was conceived as a common market between European nations, that would overcome the divisions of the Second World War; and unite against the Soviet Union. When the Soviet Union expired; the Eurozone expanded into former Warsaw Pact countries, with the same common market model. To enable greater trade between nations, a single currency was adopted. Although no provision was made for fiscal and political union; no provision for exit was made either. Political and fiscal union was implicit therefore. Loss of national sovereingty was therefore built into the Eurozone, however no conditions were set to trigger the fiscal and political union that would lead to this loss.

Germany is the winner


The Single Currency is the source of the crisis

The Euro was presented as the solution to facilitate greater trade between the nations of the Eurozone; and between the Eurozone and the rest of the World. It has been successful in both cases; however success is biased towards the facilitation of intra-Eurozone rather than extra-Eurozone trade.

Germany acquired a large competitive advantage over its Eurozone neighbours; which allowed it to save and then expand its manufacturing base by exporting within the Eurozone. Investors and bankers assumed that the fact that there was no exit clause for a Eurozone nation meant that bailouts of weak nations were explicit. Interest rates therefore converged upon the lowest rate in Germany. The convergence of interest rates led to consumption and investment booms across the Eurozone. Low interest rates financed the accumulation of Germany's export surplus to its Eurozone neighbours.

The American Credit Crunch triggered a collapse of demand from the Anglo-Saxon trade partners. The spill-over into Emerging Markets, caused a drop in demand from this other twenty five percent of Eurozone demand. Since the Eurozone was not politically and fiscally unified, there was no fiscal stimulus package like that which was to be found in other countries. In addition, the single inflation mandate of the ECB meant that it could not be relied upon to supply a monetary stimulus.

The Eurozone therefore parasited on the fiscal and monetary stimuli of other nations in the global economy. When the global fiscal and monetary stimuli began to wear out; European weakness was exposed. The European response to falling demand was fiscal austerity. Eurozone nations were directed to reduce their debts in order to service them out of falling tax revenues. Thus as global demand was falling, Eurozone demand fell as well.

The only solution for Europe is a fiscal stimulus; however without fiscal and political union this is impossible to achieve. The fiscal stimulus will involve transfers from the surplus countries to the deficit countries; in addition surplus countries must stimulate imports from deficit countries. The surplus countries are however unwilling to recycle their surpluses and open their economies.

Currently, Eurozone policy makers are trying to execute a fiscal and political union; by enforcing conditions upon the indebted nations, which force them to yield political and fiscal control in return for fiscal transfers known as bailouts.

Italy's historical precedent


Wider yield spreads signal political union

As anecdotal evidence, it is worth considering the case of Italian political unification. Presaging this event there was a widening in bond yield spreads and a debt crisis. If history is rhyming, political union in Europe is coming.


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      Agus 2 years ago

      . Remember that in a double-whammy eleocitn year, he is locked not only in a grand coalition, but in a struggle with the ex-comunnist Left party. The bottom-line of the SPD's argument is that Anglo-American capitalism is to blame for the crisis, not the lovely German social market economy . The SPD blasts the lack of financial regulation. You wonder, of course, where German/European regulators were when Hypo Real Estate's Irish subsidiary went off the cliffs. Never mind that Mr. Steinbrfcck's party has been holding the Finance Ministry ever since 1998, which is responsible for the regulation of the financial sector. So it may be all It's politics stupid . And so far the strategy has been holding up: The left has not gained in the polls.Politics aside, it is quite interesting how many disconnects there are: on the size of a economic stimulus, on the need for a stress test etc. I find it very interesting that Simon Johnson too-big-to-fail-argument hardly resonates in Germany. Commerzbank just bought Dresdner Bank (with government help), and Deutsche Bank is taking over Postbank .

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      Crowdsourcerer 5 years ago from Dubai

      Scenario 3 looks like it's the magic number Chris.

    • CHRIS57 profile image

      CHRIS57 5 years ago from Northern Germany

      Great hub with a lot of insight.

      The topic lets me remember a recent board meeting in my company before summer vacation. At the end of July my company was flooded with orders from all over the world. Explanation is simple. Most of our competitors (high tech stuff) are located in the US and within weeks we had aquired a competitive advantage of another 8 to 10% due to the weak Euro. To handle this and the future, we came up with 3 scenarios:

      1. Euro/USD parity: If USD appreciates even more, we would run out of capacity to meet demand. Immediate action required, no summer vacation for executives :-(

      2. Euro pulls through: We got our share of the business. Adapt production, only tactical action, not much to worry about, take a leave for summer vacation :-)

      3. Someone on the political/ financial side looses nerves, floods economy with money: This is the strategic objective, no immediate action required, but eventually increased demand will reach us, again: take a leave for summer vacation :-)

      Well, i had my 3 weeks of summer vacation and my executive collegues as well. We had decided for option 2. Now in the middle of September i think that scenario 3 is the most likely. It is not only someone who lost his nerves but it is sometwo: Mario Draghi and Ben Bernanke.

      Good times for people who think further than quarterly earning reports. The future is clearly written on the wall.