External Imbalances in the Euro Area

This important IMF paper is a rich account of how external imbalances emerged in the euro area. A key policy issue it highlights is the importance of the external value of the euro as a key variable.

20 thoughts on “External Imbalances in the Euro Area”

  1. Tough going for a non economist! The overall impression is given that economics is some external phenomenon, like the weather, not anybody’s fault or within anybody’s control.
    Thus Greece’s woes and Ireland’s and Portugal’s etc. seem to be down to “asymmetric” shocks. There must be something more profoundly at work than that. It is surely no coincidence that the losers are the same old suspects and the winners are also the same. Put another way it is hard to envisage an asymmetric shock which will place Germany at the bottom of the class and Greece at the top.

  2. Ireland should leave the euro.

    The euro is simply a tool for German hegemony over Europe.
    Figure 9 on page 37 details the extent of German ‘investment’ in the peripheral economies. Every cent of that investment is now being extracted. And every cent of mobile and speculative capital is being sucked without apology into Germany.

    Low tech industries in Southern Europe have been destroyed by Chinese imports, while higher tech German exports to China have ‘balanced’ Europe account. The net effect is that the export currency of Germany has been kept artificially low, helping Germany.
    Now, when the peripherals need to be helped, notwithstanding their own abysmal management of their economies, their ability to manoeuvre is tied hand and foot by Germany’s refusal to countenance any solution that lessens in any way the primacy of her own national interest.

    It is time for this country to grit its teeth and put its own national interest and the interests of its young people first.

    Right now, the youth of Ireland are destined to be galley slaves in the Germany brave new world, sold into that slavery by the me first generation.

    It is time to leave the euro to its German masters.

  3. @Joe Ryan: !!

    It’s been 5 years and if we stay in the euro it will be another 10 years before we dig ourselves out.

    Let’s just admit it isn’t for us, say sorry to our European ‘partners’ and pull out.

  4. Figure 3 of this paper shows how the strength of euro was the main cause of Ireland’s loss of competitiveness between 2000 and 2010:

    “The real appreciation primarily reflected the strengthening of the euro in all five current account deficit countries”.

    In light of the high proportion of our trade that is with non-euro countries, the external value of the euro has a disproportional effect on our trade. In a recent post Brendan Walsh pointed out that it is more difficult for Ireland to cope with the gyrations of the euro than is the case for other euro area countries.

  5. Figure 3 of this paper shows how the strength of euro was the main cause of Ireland’s loss of competitiveness between 2000 and 2010:

    “The real appreciation primarily reflected the strengthening of the euro in all five current account deficit countries”.

    In light of the high proportion of our trade that is with non-euro countries, the external value of the euro has a disproportional effect on our trade. In a recent post Brendan Walsh pointed out that it is more difficult for Ireland to cope with the gyrations of the euro than is the case for other euro area countries.

  6. It was also the biggest factor in why we got ‘competitive’ again, for a while at least. Not lower wages or fees for doing business but a weak euro versus sterling/Dollar. With QE3+infinity on the cards in the US, the euro will remain weak and Ireland less competitive unless of course the European ‘leaders’ manage to undermine/value it enough via the usual mix of incompetence, hubris and ignorance or the ECB goes crazy printing.

    Either way ‘competitiveness’ for us is strongly related to dollar/pound exchange.

  7. In or out of the euro, there is a reality that is not yet on the radar — Europe faces a poorer future and Unilever, the consumer products group, is introducing smaller packaging for its cleaning, detergent and hygiene products which sell at a lower price than in the usual larger packets and containers.

    Corriere della Sera, the Italian daily, said on Monday that François Hollande doesn’t want to reform France, he just wants to pinch pennies. At some stage there won’t be a choice.

    With most Irish trade delivered into global supply chains, changes in the euro rate do not have a big impact.

    Besides, hasn’t there been a big jump in headline figures since 2000 with no impact on direct jobs numbers?

    I despair at the nonsense policy makers and some others talk on exports.

    On Monday the Irish Exporters’ Association issued a statement about the fall in Irish exports to Malaysia.

    As usual, there was no distinction made between exports from MNCs and indigenous firms – – even though most decisions on the destination of Irish exports are not made in Ireland!

    About 94% of Irish exports to China are from MNCs.

  8. @DOCM
    Not so sure Manchu is too pessimistic …..from Bloomberg.
    “Spain published the results Sept. 28 of the firm’s independent stress test of the banking system that showed seven banks, including Popular, out of 14 that were analyzed had a combined capital shortfall of 59.3 billion euros. Spanish banks face a capital shortfall that could climb to 70 billion euros to 105 billion euros to absorb losses and keep capital ratios above regulatory thresholds, Moody’s Investors Service said in a report yesterday.”

    It seems Moody’s don’t accept Wyman’s numbers together with many commentators.

  9. @ Fiatluxjnr

    “Less dire” in these circumstances means to have at least a few large banks still capable of surviving without state assistance. In any event, the cat and mouse game between Berlin and Madrid continues. No prizes for guessing which is the mouse.

    Der Spiegel on-line carried a very critical article of both Steinbrueck and the SPD by a well-known left leaning commentator, Jakob Augstein. Google Translate will give the gist of it.

    http://www.spiegel.de/politik/deutschland/jakob-augstein-ueber-spd-kanzlerkandidat-steinbrueck-a-858877.html

    The best comment, I thought, was to the effect that Steinbrueck, having been an excellent deregulated as Merkel’s finance minister, might do an equally good job as a regulator, but not as Chancellor. It seems to me that the earlier than expected declaration by the SPD of Steinbrueck as candidate changes the entire European political landscape, unfortunately, not to Ireland’s advantage. With the best will in the world, I cannot make the recent official statements rhyme with anything that actually appears to be happening.

  10. @BWII

    if the game is stacked in your favour it is hardly surprising its the ‘same old winners’. The dice is loaded. Yes we signed up to the game because we naively thought the dice was loaded….but in our favour….we learned a….actually we have learned nothing.

  11. @docm

    Spain had been spinning 50 – 60bn. 59.3 is not 59.99 but…

    Note that OW have helpfully factored in profits that might not occur to the extent forecast, as contributing to the capital requirements and, slightly oddly, reduced to 6% core T1 required for an adverse scenario.

    Whilst there is logic in this if that scenario were very cyclical and brief, the market is unlikely to be so sanguine should that scenario appear likely.

    Really, 9% would look more convincing.

    At the moment it appears the market is going with the flow, because,… everyone else seems to be going with the flow, including the Russian central bank.

    BTW, there are currently some very, very large speculative long positions in platinum, silver and gold which suggests the rally is currently very dependent on printing expectations.

  12. @ grumpy

    I will take your word for it. My – limited – knowledge of the operation of the markets has convinced me that they are little different from a day at the races. Every – or almost every – operation is a bet. Even the great JMK got it wrong.

    What I think I might have a better handle on, however, is the politics of the situation. What I see is the classic muddling through model which has kept the EU still erect on the high wire when the audience is expecting it to fall at any moment.

  13. Blind Biddy has brought this to my attention:

    Some lite reading on the ongoing War between enlightenedCitizenry & the Rogue Financial System, the latter unfortunately winning at the mo;

    10/02/2012
    Interview with Economist Joseph Stiglitz

    ‘The American Dream Has Become a Myth’

    The finance industry is to blame for the growing divide between the rich and poor in the United States, says Nobel Prize-winning economics professor Joseph Stiglitz. In an interview with SPIEGEL, he accuses the industry of preying on the poor and buying government policies that help them get richer.

    http://www.spiegel.de/international/world/inequality-in-the-us-interview-with-economist-joseph-stiglitz-a-858906.html

    Ditto re Gov policies in Europe.

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