Eurozone Rebalancing is an Illusion


Analysis: No respite for euro zone in long rebalancing slog | Reuters.

According to the mainstream media, there is a dramatic rebalancing underway in the Eurozone that should solve all of its problems within a few years. While there has been some improvement in economic numbers, journalists do not understand that the size of these improvements is not large enough to make a dent in the imbalances plaguing the the Eurozone. There is plenty of misinformation in this article that must be debunked. The opening passage of the article is a good place to start.

Countries on the southern rim of the euro zone have made big strides in reducing their budget and trade deficits.They are no longer living way beyond their means.

The PIIGS have reduced their trade deficits, but their budget deficits remain high. The reduction in trade deficits has come primarily from declining imports, because people are cutting back spending in the face of double-digit unemployment rates. With budget deficits ranging from 4% in Italy to over 13% in Ireland, these countries are still living above their means.

They have also introduced politically touchy structural reforms, notably to make their labor markets more flexible.

This is the most repeated misconception in the Eurocrisis. There has been virtually no movement on this front. In Italy, reforms were watered down so that they were rendered meaningless. In Greece, bureaucrats simply ignore legislation passed by Parliament. No matter what these outlets report, it is still difficult to fire workers in all of the PIIGS so that youth unemployment remains high. The only country that has passed and  implemented labor reforms is Germany, and Chancellor Schroeder promptly lost his job. Don’t think this lesson has been lost on PIIGS politicians.

Berenberg Bank said all forward-looking indicators point to a resumption of growth this spring, which should further reduce the euro zone’s aggregate fiscal deficit to below 2.5 percent of GDP in 2013.

Believe this only when you see it. PMIs remain below expansion levels in the entire Eurozone. Budget cuts will continue to reduce growth in the large countries of Spain, Italy and France. Moreover, the problem with Eurozone indebtedness is not the total but the divergence between the core and periphery. No one doubts that the FANG have their deficits under control, but the periphery’s are still rising. This information confirms that the euro is driving the countries into two zones. As long as this imbalance persists, so will the Eurocrisis.

Switching resources to exports from domestic sectors such as construction in Spain and public services in France would reduce the need for further real exchange rate depreciation.

This is a great idea except for it being impossible to implement. Every country is trying to increase exports at the same time to improve growth, but there is only so much demand in the world. It’s a zero sum game, unless all of these countries increase their interplanetary trade. I understand that the depreciation of the euro versus the quatloo will result in increases in exports to the rest of the Universe.

Europe is just not doing enough to solve these problems. Internal imbalances have not improved as much as needed, and at the present rate of change will take decades to right themselves. The Eurozone does not have decades, just years and maybe only months.

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