Constantin Gurdgiev is head of research with St. Columbanus IA and lecturer in finance at Trinity College, Dublin
Amidst the media hype surrounding the S&P decision last Friday to downgrade European economies credit ratings, the latest figures on external trade from Eurostat went practically unnoticed.
The the data looks at November -- the first month of the renewed growth slowdown in Europe -- and provides some interesting insight into the prospects for fiscal recoveries within the euro area's highly indebted economies, also known as the PIIGS.
Recall that Europe has made a clear bet on the ability of its debt-ridden 'peripheral' states to trade out of their excessive debts. So much is clear from the totality of the policy responses to-date:
- ECB insistence on sterilized liquidity interventions in the banking sector is consistent only with the central bankers’ view of the ongoing banking crisis as being a temporary reflection of the weaknesses in the sovereign bond prices. Substituting private sources of funding for the banks with ECB and NCB loans can provide only a temporary relief, not a permanent solution and as such can only be consistent with the view that the crisis is temporary in nature.
- European and national leaders uniform insistence that PSI (Private Sector Involvement) arrangements for Greece constitute a unique case and must be agreed upon via a ‘voluntary’ process, so that the recognition of the insolvency crisis is strictly limited to Greece.
- European and national leaders uniform focus on fiscal austerity as the core driver for fiscal adjustments (both preventative, as in the case of France and Spain, and reactive, as in the case of the ‘peripheral’ states) is consistent solely with the view that the EU member states can recover economic losses arising from the reduction in the public investment and spending though generation of external surpluses. In other words, external trade is supposed to take over as the only driver for growth in years to come.
Some of the 'peripheral' states -- namely Portugal, Ireland and even Greece -- have clearly stated that 'exports-led growth' is to remain the only game in town as their economies struggle to balance the books and generate surpluses required to pay down their public debts. Across the EU at large, and in Germany, one commonly hears about the need to realign global trade imbalances toward greater trade surpluses in favour of Europe.
Logically, if trade were to become a core driver for European recovery, other European policies aimed at resolving the crises should be also aligned with this objective. Specifically, the core policies aimed at stabilization of the banking sector and public finances should provide support to those countries that can successfully trade out of their debt predicaments, not the countries that need restructuring. And the figures for external trade show just which countries can manage their own path (with some help) and which need an equivalent of sovereign bankruptcy.
The attached chart and the table above show that of all European states currently under severe pressure, Ireland is the only one that can offer at least theoretical hope of trading out of its current crisis. Ireland's trade surplus over the last two months for which data is available, and incidentally, the first two months of the latest economic slowdown, stood at an impressive €4.7-billion or 2.99 per cent of the country's GDP. One caveat is that this data reflects only trade in goods, with the invisibles (aka services) trade not factored in. Critically, Ireland's exports rose 8.3 per cent month-over-month in November, 8 per cent in Portugal, 2.6 per cent in Belgium, 0.3 per cent in Spain, and shrunk 14.4 per cent in Greece. Ireland exports were five times those of Greece and 3.5 times those of Portugal. Irish trade surplus for the last two months on the record was greater than the trade deficit of the entire euro zone itself.
This brilliant exporting performance by Ireland comes at the time when the European Union and the ECB are continuing to insist that the Irish economy should be held fully liable for repaying private sector debts extended to the insolvent reckless Irish banks by other reckless banks and investors from the rest of the euro zone. In effect, European policies today are destroying the only economy in the 'peripheral' state's club that, given the right – and legally and economically sensible – conditions can actually trade out of its crisis.
If this is what passes for 'leadership' in Europe, perhaps it is time to rethink if the entire European project is fit for purpose?