International trade: We can’t export our way out of the crisis
30 October 2012
To come up with the money to pay for its crisis, the eurozone has decided to export at any cost, slashing wages across the union, and courting customers abroad. The problem: that’s exactly what the countries in the Americas and Asia are trying as well.
Brian Hayes glows with quiet pride. Ireland could serve as an example for other states in crisis, the Minister of State at Ireland’s Department of Finance said recently in Berlin. Despite high deficits and debt, rising unemployment and falling wages, Ireland has in fact been getting pats on the back from all sides for months now. It has, after all, something going for it: export surpluses. Ireland is selling its wares around the world and putting its own house in order at the expense of other countries. And gradually, the other members of the eurozone are falling into step with Ireland. In the Americas and Asia, observers are watching this unfold with unease.
Pushing exports is at the very heart of the strategy for tackling the crisis. While eurozone bailouts, bond purchases by the central bank and savings programmes are intended to reassure only the financial market investors, the path to stability starts with economic growth through exports. The eurozone is changing its business model – and the model for that is far less Ireland than it is the export giant Germany.
To strengthen their positions on global markets, the crisis countries of the eurozone in particular are focusing on wages. These must sink, to make production cheaper. This works via three levers, says Christoph Weil from Commerzbank. Firstly, the recession and high joblessness have weakened unions’ bargaining power. Secondly, many peripheral countries have cut public employee salaries. And finally, labour market reforms, striking holidays off the calendar, lowering the minimum wage and other measures are also doing their bit to push down wages.
Result: “The peripheral eurozone countries are making great strides in competitiveness”, writes the Crédit Suisse economists. These great strides are making people poorer and eroding their purchasing power. In the southern countries of the monetary union, real domestic demand has contracted by 15 percent. Thanks to the crisis, imports into Greece during the first seven months of this year are down by 13 percent, into Italy and Portugal by six percent, and into Spain by three percent. Since exports have fallen at the same time, foreign trade deficits are melting away, and Spain and Italy are now back in the black. “The eurozone is becoming more like Germany,” says Credit Suisse.
The risk of trade disputes
Greece, Spain and Portugal will find it very difficult to pay off the debt within the eurozone in this way, however; Germany’s head start is just too big. Exporting countries like Germany and the Netherlands have responded to the falling production costs of the southern European rivals with price cuts of their own. And that is why eurozone countries are seeking their fortune far from home and targeting the markets in the Far East and the Americas.
The Asians and the Americans recognize this as a challenge. And they are pursuing a similar strategy there. U.S. President Barack Obama, for example, has announced that the U.S. intends to grow more by boosting its exports. This is not working out too well with the European business strategy. In August, U.S. exports to the Old World stagnated, and the story from China is similar. They are not the only ones who are worried: Japan has seen its exports to Europe fall by six percent this year, while imports from Europe have risen by 18 percent.
With its export drive, Europe is trying to chip away at the growth rates of other states. “The rising current account surplus of the eurozone entails a negative shock to the global economy,” according to Credit Suisse.
This increases the risk of trade disputes. “Many industrially developed countries suffer from weak growth and high debt,” says Patrick Artus of the French bank Natixis. “This furnishes a strong incentive for a policy that eschews cooperation.” In essence, the major trade blocs are trying to unload the cost of the crisis onto each other.
Translated from the German by Anton Baer