Which Eurozone Country Is Benefiting The Most From The Single Currency In Terms Of Competitiveness ?

[Deckard]

I bet the PIIGS thought that by joining the Euro they would only ever benefit, "strength in unity" and so on.

Get a seat at the big table with the heavyweight European economies... what could possibly go wrong?

Well, at last I found official statistics which seem to confirm what empirical evidence has been suggesting since the Euro became legal tender.

1) competitiveness within the Eurozone, measured as real effective exchange rates, varies significantly across member states.

2) the single currency favours the stronger economies against the weaker ones.

Here is the Eurostat's definition of REER:

http://epp.eurostat.ec.europa.eu/portal/pa...t_code=TSDEC330

The REER (or relative price and cost indicators) aim to assess a country's (or currency area's) price or cost competitiveness relative to its principal competitors in international markets. Changes in cost and price competitiveness depend not only on exchange rate movements but also on cost and price trends. The specific REER for the Sustainable Development Indicators is deflated by nominal unit labour costs (total economy) against a panel of 36 countries (= EU27 + 9 other industrial countries: Australia, Canada, United States, Japan, Norway, New Zealand, Mexico, Switzerland, and Turkey). Double export weights are used to calculate REERs, reflecting not only competition in the home markets of the various competitors, but also competition in export markets elsewhere. A rise in the index means a loss of competitiveness.

Well, what has happened to REER since 1999?

Using as index 1999 = 100, this is how competitiveness stands at the end of 2008 according to Eurostat http://epp.eurostat.ec.europa.eu/tgm/web/_...330HTMLDesc.htm

Germany 92.17

France 108.26

Greece 108.99

Portugal 113.40

Spain 116.68

Italy 117.08

Ireland 131.77

And here is a chart to help visualize it.

In short, as of the end of last year Germany was the only major economy within the Eurozone to have benefited from the single currency in terms of competitiveness.

Now it's clear why noboby in Germany is worried about the current strenght of the Euro - but how long can the PIIGS carry on like this? We shall see...

Edited September 1, 2009 by VoteWithYourFeet

[Deckard]

Confirmed by the WEF's Global Competitiveness Index for 2009.

[indirectapproach]

Could it be the PIIGS can afford this drift in competitiveness because the Hun is propping them up?

[Deckard]

Could it be the PIIGS can afford this drift in competitiveness because the Hun is propping them up?

I don't think so.

First of all, they cannot afford it: their economies are going down the drain.

Secondly, how exactly would you say the "Hun" is propping them up?

[Deckard]

And now, having acknowledged that the unbalances within the Eurozone are just too big, the market has come up with a way to hedge against PIIGS risk specifically.

Sept. 11 (Bloomberg) -- The return of Italian bond futures next week after a 10-year absence may help traders better protect against price swings in Europe’s lower-rated debt than contracts tied to German bunds.

Ten-year Italian bond futures start trading on Eurex, Europe’s biggest derivatives exchange, Sept. 14. F&C Asset Management Plc, Investec Asset Management and Aletti Gestielle SGR SpA said the contracts should enable them to hedge their holdings of Greek, Irish and Portuguese debt more effectively as the slump in those securities during the financial crisis caused the gap between their yields and benchmark bunds to widen to the most since the introduction of the euro.

“It will be very useful,†said Fabrizio Fiorini, a money manager at Aletti Gestielle in Milan, one of the 10 biggest holders of Italian bonds, according to data compiled by Bloomberg. “I can use it as a proxy†for the so-called peripheral bond markets, he said.

...

Demand for an alternative to German futures increased this year as the difference in yield, or spread, between the debt of so-called peripheral borrowers, or nations whose bonds are rated less than AAA, and bunds widened to records amid the worst recession since World War II.

The expansion in spreads made it “extremely difficult†to use German bund futures as a hedging tool for lower-rated debt as their correlation diminished, said Luca Cazzulani, a fixed- income strategist in Milan at UniCredit Markets & Investment Banking, a unit of Italy’s biggest lender.

[indirectapproach]

I don't know.

I was more genuinely asking than using the interrogative form to make a point.

Could it be the PIIGS are content to drift merrily along in the expectation the Hun will bail them out through an ECB rescue package (like the IMF but not) rather than face the pain of change?

[Deckard]

Could it be the PIIGS are content to drift merrily along in the expectation the Hun will bail them out through an ECB rescue package (like the IMF but not) rather than face the pain of change?

The signals sent out by Merkel back in february go strongly against that logic.

Also, the political implications of an ECB rescue package make it a virtual impossibility.

How much money should Ireland get vs Spain etc etc.

[Deckard]

And here is the latest report in the financial press highlighting the imbalances within the Eurozone, and the inadequacy of the "one rate fits all" approach.

Europe's two-speed economy complicates ECB's rate plans

Sept. 15 (Bloomberg) -- Europe’s economies are rebounding at different speeds, complicating the European Central Bank’s efforts to put the region back on a more stable footing.

Even as the global economy recovers and Germany and France return to growth, the European Commission yesterday cut its forecasts for Spain and Italy. Deutsche Bank AG says some of the economies that were once motors of growth and job creation across the 16-nation bloc may stay mired in recession next year.

The risk is that a recovery in the largest euro nations will prompt the ECB to tighten policy before smaller countries like Spain or Ireland are ready, hobbling economies already struggling with slumping house prices and surging unemployment. That will make it harder for governments and consumers to pay interest on their mounting debt, potentially pushing their borrowing costs higher.

...

Central bank officials, who say they look at the euro region as a whole rather than setting policy for individual countries, may nevertheless have to examine national economies more closely this time before raising rates.

Spain and Ireland are suffering the collapse of decade-long economic booms that marked them out from the rest of the euro region. Unemployment in Spain, which at its peak created half the new jobs in the euro region, is heading for 20 percent. The Irish government will tomorrow announce the details of a so- called bad bank set up to clean up 90 billion euros of loans that went bad during the country’s housing bust.

...

Government and consumer debt in some economies may also prompt some ECB officials to think about the lopsided impact of rate increases. Consumer debt in Ireland and Spain is more than 80 percent of GDP, compared with 59 percent in Germany and 49 percent in France, according to Societe Generale.

Edited September 15, 2009 by VoteWithYourFeet

[Deckard]

How long can this continue?

Italy Aug Industrial Orders -8.6% On Mo; -27.5% On Yr

ROME (Dow Jones)--Italian industrial orders unexpectedly fell on the month in August, posting the biggest drop since the historical series began in January 2000, as foreign demand slipped, national statistics office Istat said Tuesday.

On the month, industrial orders in August fell a seasonally-adjusted 8.6% compared with a downwardly revised 2.1% climb in July.

Industrial orders fell an unadjusted 27.5% on the year in August, a drop for the 11th month in a row. In July, industrial orders fell 23.2% on the year.

Economists polled by Dow Jones Newswires forecasted for August a 2.9% rise on the month and a 17.2% drop on the year.

Industrial sales were down a workday-adjusted 21.2% on the year in August, compared with a 21.7% drop in July. Sales on the month decreased 1.4% in August as foreign industrial sales were down 2.0% and national sales dropped 1.1%.

In the meantime, FX markets are laughing at JCT's half-@ssed attempt to talk the Euro down.

Not good enough Jean-Claude, everybody knows you are a useless puppet pretending to care about the Eurozone economy, while in reality you are just obeying your German masters' orders

Edited October 20, 2009 by VoteWithYourFeet

[Deckard]

Good article on this topic on Bloomberg this morning.

Oct. 29 (Bloomberg) -- Germany is finding quality counts when it comes to the rising euro.

While its 17 percent gain against the dollar since March has been called a “disaster” by French officials worried it will dent the recovery, Germany is banking on the reputation of exports such as BASF SE chemicals and Daimler AG’s Mercedes cars. Germany sells almost a third of “high quality” European exports, according to economists at the Paris-based CEPII institute. France has 12 percent and Spain just 3 percent.

Germany’s ability to cope with the stronger euro may help it pull away from the rest of the euro region as global trade picks up. Its success also highlights the risk that the currency will further widen the growth gap between Germany and nations such as Spain that were already lagging behind the global recovery and struggling with gaping budget deficits.

...

German exports may rise almost 6 percent next year, Deutsche Bank AG forecasts, compared with 4.4 percent for the euro region as a whole. French exports will rise 3.8 percent and Spanish foreign sales just 2.4 percent, Deutsche Bank says, while Italian exports may drop 3.4 percent.

...

Germany’s share of high-end exports is almost three times Italy’s, says Professor Lionel Fontagne at the CEPII and Paris School of Economics. His research gauges the additional price customers are prepared to pay for similar products.

“The kind of specialization of Germany is very much based on what we could call incremental innovation,” Fontagne said. “You keep exporting the same products, and from year to year you just improve the quality of the product.”

German exporters have benefited the most in Europe from China’s emergence as the world’s third-largest economy. Last year it accounted for almost half of the EU’s sales to China and German exports to China more than tripled between 2000 and 2008. French and Italian exports doubled in the period.

...

The danger for the euro region is that the stronger currency will hurt some countries more than others. Spanish exporters are already suffering because they don’t have brands that foreigners will buy when the stronger euro makes them more expensive, said Balbino Prieto, chairman of the Madrid-based Spanish Exporters and Investors Club.

[Deckard]

Bloomberg jumping again on this story

German Exports Undercut Trichet’s Weaker Euro Push

By Matthew Brown and Oliver Biggadike

Nov. 9 (Bloomberg) -- A decade after the euro replaced the deutsche mark, Germany’s export-driven recovery is undermining European Central Bank President Jean-Claude Trichet’s efforts to slow the currency’s record rise.

Speculators are the most bullish in almost two years on the euro, betting the eight-month, 20 percent rally won’t stop until it hurts the continent’s biggest economy. Even as Spain, France and Portugal advocate weakening the euro to lower the price of their products overseas, 32 of 47 strategists surveyed by Bloomberg forecast an increase from last week’s $1.4847 close by Dec. 31 or March 31. It rose 0.5 percent to trade at $1.4921 as of 12:56 p.m. in Tokyo.

Intended to unify, the euro is proving divisive as Europe battles recession.

Germany, the world’s largest goods exporter in 2008, is leading the rebound, deflating pressure to depreciate the currency. Trichet has argued for a strong dollar repeatedly, calling it “extremely important” Oct. 15. A day later, Germany’s then-Economy Minister Karl-Theodor zu Guttenberg said “there is no reason for concern” because his country’s competitiveness “does not depend on the dollar rate” versus the euro.

...

Henri Guaino, an aide to French President Nicolas Sarkozy, called the euro at $1.50 a “disaster” on Oct. 20, the day before it hit that level for the first time in 14 months. Portuguese Finance Minister Fernando Teixeira dos Santos said in an Oct. 1 interview that he looks with “concern” at its impact on his country’s exports, which fell to a four-year low in August.

Trichet said on Nov. 5 that ECB officials “appreciate” U.S. statements supporting a “strong dollar,” a phrase he uttered at least seven other times in the previous five weeks. “I echo this statement as something which is important in the present circumstances,” he said at a Frankfurt press conference. Ivan Sramko, an ECB governing council member, was more direct on Oct. 23, saying the euro rally may cause economic “problems.”

European Monetary Affairs Commissioner Joaquin Almunia, French Finance Minister Christine Lagarde and Spanish Finance and Economy Minister Elena Salgado also have complained about the euro’s strength in the past two months.

Germany is looking after number one, and everyone else in the Eurozone can go and screw themselves.

[wren]

I think that in recent years for example Spain experienced greater salary increases which tended to reduce their competitiveness relative to Germany, where salary increases were lower.

They need pay cuts to improve their competitiveness.

[swissy_fit]

I don't quite understand the point of this thread.

Is it that the nasty Germans are cheating by working harder for less, planning ahead, being more organised and resisting inflation, ?

Obviously they should be thrown out of the Euro!

Edited November 25, 2009 by gleeful_expat

[Deckard]

I don't quite understand the point of this thread.

Is it that the nasty Germans are cheating by working harder for less, planning ahead, being more organised and resisting inflation, ?

Obviously they should be thrown out of the Euro!

The point I am making is clearly stated in my first post:the PIIGS politicians thought that they were being clever by joining the Euro, and they would benefit from the single currency without having to put in the effort to improve the efficiency of their economies to put them on a par with Germany.

How wrong they were.

At the same time, the ECB is virtually run by the Germans and monetary policy decision in the Eurozone are dictated by them.

The question is, for how long is this sustainable in the current crisis?

Your comments are welcome.

Edited November 26, 2009 by VoteWithYourFeet

[swissy_fit]

The point I am making is clearly stated in my first post:the PIIGS politicians thought that they were being clever by joining the Euro, and they would benefit from the single currency without having to put in the effort to improve the efficiency of their economies to put them on a par with Germany.

How wrong they were.

At the same time, the ECB is virtually run by the Germans and monetary policy decision in the Eurozone are dictated by them.

The question is, for how long is this sustainable in the current crisis?

Your comments are welcome.

Ah, OK, so your point is that the PIIGS leaders were stupid to enter into anything with the Germans, because they should have known that their own cultures were made up of criminals, old boys clubs and feckless debt-junkies who would never be able to compete with them without having their own currencies to devalue and maintain competitiveness.

Is that right?

You're looking for an awful lot of self-awareness in the PIIGS leaders, I think it's more likely they genuinely believed they could compete and that their people could change, or maybe they even deluded themselves that they were already as good. They were wrong, of course.

I don't think it's sustainable unless the Germans cough up to subsidise enormous unemployment in the PIIGS, or agree to devaluation, and I don't think they'll do this. Greece is even more bankrupt than the UK, and even more deluded.

The one plus point is that the big Euro economies seem to be surviving better, and the Irish are doing what is necessary. I think the Euro could easily survive the loss of Greece, they lied to get in anyway. Italy and Spain are another matter, but somehow I think they'll survive.

[Deckard]

Ah, OK, so your point is that the PIIGS leaders were stupid to enter into anything with the Germans, because they should have known that their own cultures were made up of criminals, old boys clubs and feckless debt-junkies who would never be able to compete with them without having their own currencies to devalue and maintain competitiveness.

Is that right?

Well, not quite.

Your wording sounds like it's meant for the UK - a country which I am assuming you left with no regrets.

IMO the PIIGS have other problems, the main one being an incredibly rigid and inefficient labour market, which stifles their competitiveness - but the list is very long.

For the record, I am Italian. I lived in London for many years, then went back home a couple of years ago.

My remarks are based on my personal experience, as well as regular contact with friends all over Europe.

You're looking for an awful lot of self-awareness in the PIIGS leaders, I think it's more likely they genuinely believed they could compete and that their people could change, or maybe they even deluded themselves that they were already as good. They were wrong, of course.

mmmm... I doubt it. Politicians are the same everywhere: they pursue short term political gains without looking at the long terms consequences of their decisions.

I don't think it's sustainable unless the Germans cough up to subsidise enormous unemployment in the PIIGS, or agree to devaluation, and I don't think they'll do this. Greece is even more bankrupt than the UK, and even more deluded.

+1

The one plus point is that the big Euro economies seem to be surviving better, and the Irish are doing what is necessary. I think the Euro could easily survive the loss of Greece, they lied to get in anyway. Italy and Spain are another matter, but somehow I think they'll survive.

Things are dire here in Italy, and made much, much worse by the current strength of the Euro. Same in Spain, but with a worse housing bubble.

Quite frankly, people here couldn't give a toss if the Germans are doing ok from the single currency, as you can easily imagine.

[swissy_fit]

Well, not quite.

Your wording sounds like it's meant for the UK - a country which I am assuming you left with no regrets.

IMO the PIIGS have other problems, the main one being an incredibly rigid and inefficient labour market, which stifles their competitiveness - but the list is very long.

For the record, I am Italian. I lived in London for many years, then went back home a couple of years ago.

My remarks are based on my personal experience, as well as regular contact with friends all over Europe.

mmmm... I doubt it. Politicians are the same everywhere: they pursue short term political gains without looking at the long terms consequences of their decisions.

+1

Things are dire here in Italy, and made much, much worse by the current strength of the Euro. Same in Spain, but with a worse housing bubble.

Quite frankly, people here couldn't give a toss if the Germans are doing ok from the single currency, as you can easily imagine.

You went back a couple of years ago? Well done - very good timing(currency-wise, at least). Not so good if you were starting an export business in Italy....

My wording was intended for several countries, the UK and Italy included (sorry).

I agree with most of your points, but as ever the French are surviving despite their inflexible labour laws, the French economy is a mystery to me, it defies logic.

I'm intrigued to know how bad it is in Italy - nothing will change until people are rioting or considering voting for a party to take them out of the Euro or both- I take it that isn't on the cards?

[Deckard]

nothing will change until people are rioting or considering voting for a party to take them out of the Euro or both- I take it that isn't on the cards?

No, it isn't.

In all fairness, it's unthinkable for any of the PIIGS to abandon the Euro unilaterally - the costs would far outweight the benefits.

Perhaps some kind of agreement whereby the PIIGS pull out together would work - but I really cannot see this happen for political reasons (Berlusconi not agreeing with Zapatero on details of the agreement, or some such).

I suspect the Euro is here to stay, but at some point the Germans will have to choose between letting the Euro devalue, or bail out the PIIGS (which I believe would have the same effect on the Euro anyway).

Unless of course the recovereh really is under way

Edited November 26, 2009 by VoteWithYourFeet

[swissy_fit]

No, it isn't.

In all fairness, it's unthinkable for any of the PIIGS to abandon the Euro unilaterally - the costs would far outweight the benefits.

Perhaps some kind of agreement whereby the PIIGS pull out together would work - but I really cannot see this happen for political reasons (Berlusconi not agreeing with Zapatero on details of the agreement, or some such).

I suspect the Euro is here to stay, but at some point the Germans will have to choose between letting the Euro devalue, or bail out the PIIGS (which I believe would have the same effect on the Euro anyway).

Unless of course the recovereh really is under way

I don't see how any German government will get that kind of idea past their electorate(devaluation or bailing out feckless countries).

Anything that smacks of devaluation/inflation policy will get them ejected from office in very short order, the legacy of Weimar lives on there. If they hide what's happening, then maybe, but that would be very risky. Maybe the Germans will leave the Euro, not the PIIGS!

The PIIGS aren't up to competing against the Germans on a level playing field(the Euro), in the end something will have to give. 20% unemployment in Spain hasn't bitten deep yet, the benefits are good for a year or two I think.

When/if people start getting hungry, look out.

Can you imagine the mess in the UK now if the UK had entered the Euro a few years back?

Brown may be a totally useless kant, but he did get that right.

[Deckard]

I don't see how any German government will get that kind of idea past their electorate(devaluation or bailing out feckless countries).

Anything that smacks of devaluation/inflation policy will get them ejected from office in very short order, the legacy of Weimar lives on there. If they hide what's happening, then maybe, but that would be very risky. Maybe the Germans will leave the Euro, not the PIIGS!

True, German taxpayers wouldn't like to bail out weaker countries. And a straight ECB rescue package would also be difficult politically: how much should Greece get versus Spain and so on.

However, there are more subtle ways of rescuing the PIIGS, namely the IMF.

Merkel already hinted at this a while back, see one of my previous posts. She probably reckons Germany helping the IMF bail out the PIIGS would go down better with the German sheeple.

EDIT: forgot to add, letting the Euro gradually lose value would be a lot easier to do and politically justify to the voters ("it's the other currencies strengthening, it's global" etc).

Also, I genuinely don't believe the German economy would suffer from a lower Euro (I'm thinking 10-15% from current levels).

The PIIGS aren't up to competing against the Germans on a level playing field(the Euro), in the end something will have to give. 20% unemployment in Spain hasn't bitten deep yet, the benefits are good for a year or two I think.

When/if people start getting hungry, look out.

This is exactly the point of my thread. Glad we agree

Can you imagine the mess in the UK now if the UK had entered the Euro a few years back?

Brown may be a totally useless kant, but he did get that right.

Yep

Edited November 26, 2009 by VoteWithYourFeet

[Deckard]

20% unemployment in Spain hasn't bitten deep yet, the benefits are good for a year or two I think.

And on that note...

Spain Says Adios to Xmas as 19% Jobless Hits Spending

Fewer than half of Spain’s 3.8 million unemployed are still receiving their contributions-based jobless pay, which lasts a maximum of two years, according to Labor Ministry data. Another 1.2 million receive smaller subsidies, such as a 420 euro-a- month benefit introduced in August.

Unemployment among people younger than 25, who account for 10 percent of the labor force, is more than 40 percent ... said Francisco Ruiz, an analyst at Fortis Bank SA in Madrid.

Scary stuff indeed

[Deckard]

Standard Bank's bold assessment of the troubles in Greece and Ireland.

Dec. 11 (Bloomberg) -- Greece and Ireland are among countries in an “intolerable” economic situation, which may lead to bailouts or even an exit from the euro area by the end of next year, according to Standard Bank Plc.

The absence of a mechanism to permit so-called fiscal transfers within the 16-nation region may undermine the exchange-rate system, said Steve Barrow, head of Group of 10 foreign-exchange strategy at the bank in London. Concern some nations will need to be rescued may drive the premium investors demand to hold 10-year Greek debt instead of benchmark German bunds to 400 basis points next year, from 214 basis points today, he said. The Irish premium may also jump, he said.

“Countries like Ireland and Greece may not be able to grow out of the current crisis,” Barrow said in a telephone interview today. “With interest-rate cuts, exchange-rate depreciation and significant fiscal support all off limits for these countries, bailouts or even pullouts from EMU may happen next year.”

The Irish Finance Ministry called the suggestion it might leave the euro area “uninformed comment,” and Greece said there was no chance it would leave.

The widening difference in yield, or spread, between Greek and Irish bonds and German securities may accelerate, increasing the debt burden for these countries, he wrote in a report today. The Irish-German 10-year spread may rise to 300 basis points next year, from about 170 basis points, he said. The spread averaged about 43 basis points in the past five years, with the Greek-German average at 67 basis points in the period.

...

“It can, in many ways, be a more destructive line of attack for the market than currency pressure,” Barrow wrote.

[Deckard]

Oh look, S&P just wrote a report on REERs in the Eurozone and the rise of Germany's competitiveness.

Well done guys, you're ahead of the curve as usual

[Deckard]

Very good Spiegel article on the current crisis.

EU officials are watching with alarm as the various euro-zone countries' competitiveness diverges sharply. The differences are especially large between countries like Germany, the Netherlands and Finland, which are characterized by current account surpluses, and countries with high budget deficits. Along with Greece, this second category includes especially Spain, Portugal and Ireland.

These countries' competitiveness has dropped steadily since the euro was introduced. They lived on credit for years, seduced by the unusually low interest rates within the euro zone, and imported far more than they exported.

When demand collapsed in the wake of the global financial crisis, governments jumped in to fill the gap, with serious consequences -- debt skyrocketed. Spain's budget deficit was at 11 percent last year, while Greece's was nearly 13 percent. Such high debt is simply not sustainable in the long term.

In the past, the solution for these countries would have been to devalue their currency, which in turn would make imports more expensive and exports cheaper. Such a move would stimulate their national economies and strengthen their competitiveness.

Now, however, these countries must submit to a drastic therapy regime at the hands of the European Commission. They need to balance their budgets, while simultaneously creating more competition on the labor and goods markets.

The directives from Brussels translate into difficult sacrifices for the citizens of the affected countries. Employees will have to scale back wage demands for years, and civil servants will see their salaries cut. Ireland has already embarked on this path; Greece and Spain will follow.

[DabHand]

I dont need to read nuffink in that article, graphs or fancy equation stuff. The answer is Germany.

Its strong exports would have increased the strength of its currency. This has been ameliorated by the export weakness of other EU countries so that Germany enjoys an artfiically weakened currency to boost its export economy. Also as a net exporter it has a large EU market it can treat as internal for currency and tariff intents and purposes.

The rest of the EU (PIIGS specifically) suffer the dutch disease

http://en.wikipedia.org/wiki/Dutch_disease

Essentially their currency is far stronger than it should be due to it being shared by Germany. This strangles their industry which might otherwise enjoy the corrective advantage a weaker currency would give them.