Sent to you by diluted via Google Reader:
via I am no blog! by Kostas Avgeropoulos (Κώστας Αυγερόπουλος) on 10/22/12
"We're in a global race today. And that means an hour of reckoning for countries like ours. Sink or swim. Do or decline."
- D. Cameron 10/10/2012
Broadcast on Euronews: Jean-Claude Trichet, president of the European Central Bank until October 2011 is answering questions from young Europeans on the crisis, its causes and ways out of it. The questions and answers are moving in a well-known, clichéd pattern: if the Eurobond would be the solution, if the bankers should be so much protected, if austerity leads anywhere and that the way out according to Mr. Trichet is, "as in a household to spend as much as winning."
It is impressive: we are now entering the fifth year of the crisis and yet it seems we, in Greece but also at European level, have not come to a clear conclusion about what caused the crisis and especially how will we get out of it. Conservative analysts and economists insist that the causes lie in fiscal easing and that austerity is the solution that will regain the confidence of the panicky markets. The progressive camp, having rediscovered Keynes insists on the "counter-cyclical" action, pumping money into the market to stimulate growth (creating the well-known cliché now, "austerity versus growth" debate). The more sophisticated insist that the problem lies in the imbalances of the euro. Most populists blame bankers and fund managers for "casino capitalism", for irresponsibility and greed. In Greece, much of the blame is attributed to the "lamogia": all sorts of cheating citizens and politicians. All or at least most agree that the problem is due to the sovereign debt of certain countries and that the all-powerful Europe, if it acts collectively, maybe by two-or three financial tricks (eurobond, debt haircut, printing currency, federalizing economic policy etc.) will be enough to untangle the crisis.
But almost everyone seems to ignore the dramatic changes that have occurred in the global economy over the last decade. In January 2001, China joined the World Trade Organization, 6 years after its founding in 1995. This marked a sharp rise in the Chinese economy that pulled along the entire Southeast Asia region and almost completely reversed the international financial balances. European businesses and their employees, having enjoyed a decade of unprecedented economic boom and prosperity, suddenly found themselves under the unbearable pressure of their new competitors in the global chessboard of international trade. The 2008 financial crisis that started in America simply revealed how weak, unprepared and vulnerable were most European economies towards the new global economic reality.
The first clouds: the end of cheap fuel
The diagram below captures the trade balance of 27 in Europe (source: Eurostat, processing with GNU Octave). The first observation to make is that, after 2002, when the EU had a roughly even trade balance (black line), followed by a rapid decline until the financial crisis of 2008, after which there was a short halt, to reach today the negative of about 160 billion. This means that the EU in 2011 had a 160 billion capital outflow towards its trading partners.
What is striking, however, is that this negative balance is not due to a decrease in any of the traditional export sectors of Europe, namely chemical and heavy industry, as one would expect, but a dramatic deterioration in the balance of fossil fuels (oil, natural gas, etc., green line) from 2002 onward. The EU currently pays more than three times the amount compared to 2002 to meet its fuel needs. As shown in the chart below (source: OPEC), the increase in these expenses was not due to an increase in consumption, but to an increase in fuel prices. The price of oil in dollars more than quadrupled in 10 years, with an annual weighted average increase of 16%.
The dramatic rise in oil prices is attributed to the sharp increase in demand caused by the emerging economies of Asia and South America. Its consequences put all European economies, which had to find ways to meet the ever-growing deficit, under considerable pressure, and dramatically increased the cost of living of their citizens. It is also characteristic that in times of recession, most economies still show strong inflationary trends. Note that the exact opposite happened in supplier countries (eg Saudi Arabia, Qatar) who saw their growth in the same period to run even with double digits.
Greece and Portugal: easy victims
Greece and Portugal were the Eurozone's most unprepared countries to deal with the new economic reality. Countries with traditionally negative balance in all areas, which were trying to meet through tourism and any capital inflows from foreign investment. Their production profile, mainly based on light industry (clothing, manufactured goods and low-tech manufacturing, building materials, etc.) proved highly vulnerable to competition received from the emerging economies. In Greece we have experienced this phenomenon with the rapid deindustrialization throughout the past decade. The situation worsened considerably due to the rise in fuel prices (green line), as described previously.
Both the Greek and Portuguese governments seem to have been found completely unprepared to deal with the coming danger. Their reaction to the new reality was to increase the state debt, creating the famous "debt growth", a policy that proved fatal. The difference is that in Greece the phenomenon took by far the most explosive proportions, with the known political appointments, wastage of public funds, widespread economic criminality of all kinds, etc. The outflows of borrowed capital of Greece and Portugal at the height of the crisis in 2008 totaled 45 and 25 billion respectively, while in 2011, after two years of austerity, it could only reach its 1999 levels, mainly due to the drop in imports.
Spain: the great sick man
A similar situation is observed in the same period in Spain, mutatis mutandis. A country with traditionally high unemployment and problematic production, had the misfortune to carry extra weight due to the mistakes of its financial system with mortgage loans. The deterioration in the trade balance is a tragedy. The amount of outflow in 2008 reaches 99 billion from 41 billion in 2002. It is worth noting that the cause for this bad performance is blow suffered by the industry's heavy, and light industry, probably because of competition from countries within the European Union, while the effect of the negative balance of fossil fuels is apparent.
France: the next big headache?
When people talk about the Eurozone crisis, France rarely enters the list of problematic economies. From what it seems at least from the trade profile in recent years, this will soon change. The course of French balances as shown below is tragic. From a marginally positive balance of 2002 it reaches -85 billion in 2011 and with a still downward trend. As in Spain, the cause lies to the areas of heavy and light industry and fuel prices. The French production seems to be suffering a very deep crisis, which, in contrast to previous countries presented, has not yet halted.
Italy: not so PIG
With the outbreak of the crisis, Italy became a target mainly because of its large debt, which had been created much earlier. However, its trade profile shows a relatively healthy image, much better than that of France and Spain. Although the trade balance is negative (from positive in 2002), the areas of light and heavy industry do not seem to have been severely affected, and already show signs of recovery. It seems that Italy is perhaps the only country together with Ireland who owe their crisis almost exclusively to a large debt and fuel prices rather than problems in the real economy, which indicates that it has a potential to overcome the crisis. However, apart from debt, it faces major challenges, the most important being the fact that its heavy industry competes with the German one, which is strengthening as the crisis continues.
Germany: riding the dragon
Germany is arguably the most successful economy in the last decade in Europe and possibly in the entire western world. Its trade balance improved continuously, only with a halt during the crisis of 2008, from 133 billion in 2002 to 157 billion in 2011. It is also striking that with the exception of the food sector, all other production sectors show positive balances. German companies seem to have grasped the changes taking place in the global economy early on and turned their interest to emerging economies, turning them into highly profitable markets for themselves, while avoiding the trap of falling demand in the western world. In 2002 the balance of Germany towards other European countries amounted to 72 billion and fell by 2011 to 55 billion. Instead inflows from trade outside Europe grew from 61 billion to 102 billion. In other words, when the Chinese dragon began taking off in the beginning of the previous decade, the German economy made sure it was strapped on its back, supplying the emerging urban strata with modern cars, and new industries with equipment. It is also worth noting that it is a myth that Europe is Germany's most important trading partner. The trade gains are currently mostly outside Europe.
Netherlands: the merchant of Europe
The winners' list of the new era of globalized trade also includes the Netherlands, with a stable rating from the rating agencies being triple-A, and with a score often better than that of Germany. The trade balance has a surplus of 45 billion, or 28% of the surplus of Germany, a significant performance for a country with a population of just 17 million, or 20% of the German population. The Netherlands has surpluses in practically all areas of production other than fossil fuels and is among the few countries that seem to be particularly unaffected by the 2008 crisis. The great advantage for the Dutch economy seems to be the trade between Europe and the rest of the world: with a GDP only 25% of the German one, the volume of goods traded by the Netherlands is 50% of the volume handled by Germany.
Finland: hanging tightly on that precious AAA
Among the AAA countries of the Euro, Finland is one with strong negative trends of an already negative trade balance (Luxembourg has a constant trade deficit, due to the fact that it is a country of services rather than production). Main responsible for the decline is heavy industry with a turning point in 2008. Rating agencies, however, seem to have confidence in the country of northern Europe, perhaps due to the highly competitive economy (third in the world according to the latest report from the World Economic Forum).
...without winners
Trade balance is certainly not telling the whole truth about the economy of a country. Tourism, for example, an important source of revenue for our country, is not reflected in the trade balance. The overall flow of capital into a country is described by the balance of payments in which the trade balance is typically the most important factor. Trade balance, however, expresses in the most emphatic manner the production profile of a country, its position in the global economy and the state of its real economy.
The global economic map began to change dramatically from about 2002 onward. Many of the European countries, especially the European South, were unprepared to deal with the new economic reality and chose to cover deficits in their balances by increased borrowing. They thus entered an unprecedented crisis since WW2, called the "debt crisis" because the first obvious symptom was the inability to borrow, due to the inflated debt and unmanageable deficit. The basic cause of the crisis, however, is the fact that globalized trade has created a new reality with which these countries were unable to cope.
Those countries that have managed to adapt to the new situation, thanks to the foresight and readiness of their enterprises and their political leadership, were and are the winners of the new situation. Their benefits even increased as their competitors in Europe collapsed. The example of car manufacturers is representative of this situation, where at a time in which the German VW, BMW, and Mercedes-Benz have elevated their profits in recent years conquering the Chinese market, their competitors Renault, Citroën and FIAT, which either did not foresee the collapse of the European market or could not open successfully to the new, more dynamic markets, they see their sales decline and their factories forced to close. The quarrel that broke out in the European Automobile Manufacturers Association, where the president and CEO of FIAT blamed VW of contributing to a "bloodbath" in Europe, highlighted the gap that separates the winners from the losers of the new situation in this field. The losers of the crisis therefore include those industrialized countries of Europe that failed to understand, anticipate and react properly in the face of the new reality, falling "victims" to their competitors in Europe.
The problem is not only in the European South. These countries may be in much greater trouble, but the specter of deficits is gradually spreading across most of Europe, with austerity being applied as the only solution. The dynamism of emerging economies is based among other things on cheap labor (which is often child labor) and the lack of labor rights. In other words, the emerging economies run a the pace and the ways of European Industrial Revolution of the past centuries. This is an advantage that even advanced European economies will find difficult to confront. Until recently, European policy makers insisted that European countries must invest in high technology and innovation to offset their disadvantage in competitiveness. This argument is declining more and more, first and foremost because emerging economies are slowly closing their technological gap but also because innovation and high technology are not by themselves sufficient to sustain a substantial number of jobs when the most "traditional" sectors are collapsing. A striking example is the conflict between European Commission and China on Chinese-made solar panels that flooded the European market and seriously affected the German manufacturers. In other areas, such as the mobile phone industry Europe has lost its primacy in less than 3 years against Chinese and Korean competitors.
On the other hand protectionism, which is proposed together with nationalists by some "genuine leftists", is the worst and most dangerous solution: when a trading partner is transformed into a mere competitor in the international natural resources hunt, war against them becomes much more attractive. But if poverty advances, it is certain that the isolationist camp will win, threatening world peace. We have seen the same story unfolding during WW2.
A race with rules
The globalization of trade over the last decade clearly had many positive results. Despite major social problems in emerging economies (lack of civil liberties, inequality, poor working conditions), it is fortunate that many millions of workers in these countries now have the income to buy a car that until now could be enjoyed only by the European and North American workers, or to travel half the globe to Greece to see the Acropolis and make their holidays enjoying the Aegean Sea. However, the international regulation set by the World Trade Organization has proved inadequate because it can not prevent unfair competition caused by artificially lowering domestic demand by reducing wages or cutting core labor rights such as age limits, hours of labor (increased working hours means less time spent on consumption and therefore an indirect artificial demand drop). It also failed to prevent global recession caused by the competitiveness hunt. The question ultimately is primarily humanitarian. Do we want to live in a world where our otherwise ultramodern mobile phone is made by the hands of a small child? Do we want it to be our child tomorrow?
Things you can do from here:
- Subscribe to I am no blog! using Google Reader
- Get started using Google Reader to easily keep up with all your favorite sites
No comments:
Post a Comment