无锡壹胜达特钢:Sorting out the Euro Mess (3)

Have Southern Europeans Bought Too Many BMWs?

We are often being told that the first decade of the Euro led to artificially low rates in the South, which provoked a credit-led consumption boom that allowed the poor guys in Valencia or Lecce to buy a BMW. This story is supposed to provide a colorful illustration of the intra-Eurozone imbalances accumulated over the last decade. Yet, as we show below, the deterioration of the Southern European trade balances with Germany has accounted for a relatively modest part of the rise of their trade deficits. More importantly, the story misses the essential point about the main cause of these deficits.

Take the example of Italy. Italy had a €25bn trade surplus when the Euro was introduced in January 1999, and has a €35bn trade deficit now—that is a €60bn swing. Germany has accounted for €13bn, or 22% of the total deterioration, and this was in part caused by declining German imports during the first half of the last decade. But as the chart below illustrates, the bulk of the deterioration of Italy’s trade deficit came from oil first (€60bn since 1999), and China second (€20bn). Excluding China and oil, Italy today runs a comfortable trade surplus that is almost twice as high as it was in 1999 in nominal terms, and that has remained roughly stable as % of GDP (3% to 4%).

Thus, the idea that the rise of Southern European trade deficits was essentially due to (or reflected in) intra-Eurozone trade imbalances is largely a myth. The additional consumption of Italian and Spanish households benefitted oil-producing countries, China and other Asian countries first and foremost. And viewed from the German side of the equation, only 13% of the rise of German exports of the last decade went to Southern Europe.

Most observers and analysts now tend to interpret everything that has happened in the Euro area during the last decade as a consequence of the Euro experiment. But they hugely underestimate the fact that the rise of China during this same decade, and the accompanying explosion of commodity prices, has had even more impact on the Eurozone economies than the monetary union. This is especially true of trade development in Southern Europe.

Looking at the trade deficits in Italy and Spain, we can see that their main challenge is not to regain competiveness against German producers, but to reduce their dependency on oil imports (through the development of solar energy, for example). This will obviously take its time, and in the meantime the deleveraging Southern European countries will begin (Italy) or continue (Spain, Portugal, Greece) to improve their current account balance through lower import volumes. This would have to take place even if they left the Euro and devalued. We doubt, however, that BMW will prove to be the main victim of this inevitable development.

The Triumph of Southern Italy over Northern Italy

On the previous page, my colleague argues that Italy’s balance of payments problem is not caused by the Euro, but instead by the China factor and rising commodities prices. Besides the fact that Italy would have better adjusted to the pressures of a rising China and higher commodities prices were it not for its artificially high foreign exchange rate under the Euro, this theory fails to explain Italy’s disappearing industrial sector.

As the chart below shows, up to 2000 Italy’s industrial production and GDP grew roughly at the same rate. Then the Euro was invented, and Italian GDP growth has basically flat-lined. But the situation was far worse for the country’s industrialists as these days IP is some -15% lower than 2000 levels:

This dichotomy reveals a very sad reality—that the relative stability of GDP in Italy is thanks only to the relentless growth of the public sector:

The industrial production index gives thus a perfectly good representation of the state of the private sector in Italy—it is going out of business. Meanwhile, the free loaders’ economy of southern Italy has won the day. Unfortunately, the bill will have to fall on Northern Italy. And needless to say, if you tax Northern Italy a little more every year for the primary surplus to remain a surplus, Northern Italy grows even less, which means that the following year, you need to tax Northern Italy a little more…eventually Rocco and his brothers in the South will also find themselves in trouble.

So the Euro has in fact led to the triumph of Rome and Southern Italy over Northern Italy and of course of the rentier over the entrepreneur. Is it sustainable? No more than the Soviet Union was…

Source: JohnMauldin.com (http://s.tt/14Qf1)