13) «The balance in Europe: Spain needs rebalance its economy -urgently-«

by Javier Carro

Topics: Economy, Frontpage

13)      «The balance in Europe: Spain needs rebalance its economy -urgently-«

The euro area’s external trade balance is improving. In the first eight months of 2012, the euro area ran a surplus of €46.9 billion, compared to a deficit of €26.8 billion during the same period in 2011. Exports rose 9% from the prior year while imports were up just 2%. Yet the net swing, of less than 1% of GDP (gross domestic product), is far too small to overcome the euro area’s domestic headwinds. Ideally, there would also be substantial rebalancing within the euro area, with countries facing the harshest austerity exporting much more to a healthier set of core economies.

That’s happening, but not at all to the necessary extent. German imports rose 2% from the first half of 2011 to the first half of 2012, but its trade surplus actually rose over that period. Exports are rising -and imports collapsing- around the periphery.

Yet Greece, Spain, and Portugal continue to run substantial trade deficits.

Relative to the European average, relative to the periphery:

If the German economy were running extraordinarily hot, then the periphery would have already made up most of the competitiveness gap and could rely much more heavily on exports for growth. But the German economy is not running hot, German output continued to contract in October: weak manufacturing continued to be a problem, but service activity contracted as well.

The euro area would love to slough its problems off on others, but the rest of the global economy is too shaky to provide the strong source of external demand Europe needs. United States is trying to rebalance its economy and raise net exports, and China is trying to rebalance its economy away from imports of the massive capital goods Germany specializes in selling. The euro area needs more domestic demand, and that means more German demand.

The easiest way to pinpoint growth in Spanish demand would be stimulus: tax cuts, for example.

But looking at the euro area as a whole, one notices that euro-area nominal GDP growth was below 1% in the year to the second quarter of 2012. But in the absence of more nominal growth, the adjustment process will continue to be long, painful, and dangerous.

Monetary policy is a problem.

Spain needs rebalance its economy -urgently-, and its political economy. ∎

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