As previously discussed, the euro has a history of firming when a trade surplus develops, which works to contain net exports. Export friendly policy includes tight fiscal. And for all practical purposes a ‘sustainable’ trade surplus requires fx buying.

Japan is a recent example. When their dollar buying stopped a few years back the yen appreciated to the point where their trade surplus has faded. They are now looking at resuming (or may already have resumed?) fx purchases to reverse this effect.

Euro-Area Exports Decline for a Second Month Amid Recession

By Stefan Riecher

Dec 17 (Bloomberg) — Euro-area exports fell for a second month in October as the economy struggled to pull out of its second recession in four years.

Exports from the 17-nation currency bloc declined a seasonally adjusted 1.4 percent from September, when they fell 1.3 percent, the European Unions statistics office in Luxembourg said today. Imports rose 0.6 percent in October and the trade surplus narrowed to 7.9 billion euros ($10.4 billion) from a revised 11 billion euros in the previous month. Labor- cost growth accelerated to 2 percent in the third quarter from 1.9 percent in the prior three months, a separate report showed.

17 Responses

  1. tight fiscal trade surplus friendly or trade surplus tight fiscal friendly ? Without surplus government had to deficit spend and with government deficit spending you’d have no surplus (or less) ?

    1. @Erik Jochem, Jochem,
      I think the causation is as follows:
      Fiscal tight keeps the costs (incl wages) low and thus increases competitiveness. This triggers foreign demand that creates the trade surplus, but it also drives the currency up. To keep the currency down (or prevent it from rising too much) the govt buys (needs to buy) the fx of the target zone for the exports.

      It seems to me though that for goods that can be produced in both countries this price aspect is more relevant than for goods for which let’s say only one country has the know how.
      (e.g. it plays more for T-shirts than for BMW’s)

      1. @walter, thanks for putting me on track. I was puzzled with Warren’s answer because it seemed to imply a primary not trade related upwards pression on the currency as induced by tight fiscal (less currency in circulation). A primary effect of tight fiscal not good for exports that is.

  2. So when china ends up with their trillion in dollars why do they not turn around and go buy apple computer outright? I assume there are laws or restrictions in place to prevent that specifically but you get the idea, seems like there would always be something to buy rather than having that amount of money sitting around.. Or is that what youre saying above, that they have to hold the currency or else theyll drive the dollar down and their exports along with it?

    1. @Jerry,

      Actually, I don’t think there are any laws preventing the Chinese govt from buying Apple, or any other American company.

      I have also wondered why China doesn’t buy land, stock, etc. with all their extra dollars. Singapore and Norway both do this, but Japan and China do not. I don’t think it would affect the trade balance unless they bought up actual production (manufactured goods). It would drive asset price booms which have historically boosted America’s trade deficit. Maybe they feel they can’t find enough assets or manage things well enough to buy on that kind of scale. Could end up with a ton of corrupt or just bad investments.

      It is worth noting that most Asian countries now consider it wise to hoard large dollar reserves, in order to be able to maintain their currency pegs (official or unofficial) against pressure and insure against a repeat of the Asian Financial Crisis. However I believe China (and Japan and Taiwan) have way bigger reserves than they need for that purpose.

      My best guess is just what I said above: China (and Japan, etc.) simply don’t have structures in place to invest all that money, so they leave it in the safest and most straightforward place–Treasury bonds. They may start to put investment management structures in place and move to other assets: I have heard about China buying up agricultural land in Latin America and natural resource rights in Africa.

      1. @Chaz,

        Also, there may be a sense among Japanese and American politicians that by buying up Treasury bonds the Japanese are somehow doing us a favor. A lot of people think that if China and Japan didn’t buy up all the bonds the U.S. would go bankrupt or face unbearable interest rates. So they may do it to buy political goodwill (such as us looking the other way as they manipulate the trade balance!). Of course this is bad economics, but the politicians believe it, so it matters. China doesn’t (appear to) care about keeping the U.S. happy as much as Japan does, but they may go for this reasoning as well anyway.

  3. Warren,

    A drop in the trade surplus, but still a surplus.
    Do you expect the firming of the eur/usd to go on till the eurozone trade balance turns to a trade deficit, like what we have seen with the yen?
    On a day like today I get the impression that eur/usd also rises on the back of a ‘deal’ about the fiscal cliff that does not bring too much austerity in the US. Do you agree?

    By the way, I do not know whether Japan starts fiscal stimulus, but developments around the BOJ look to me very MMT style.

    1. I agree euro remains firm as long as trade is in surplus, particularly with continued austerity.

      but the austerity can’t end well, seems, as it ensures counter cyclical debt and unemployment continues to grow
      making the political support problematic

      1. @WARREN MOSLER, Yes, the math still does not work. In the euro zone we see shrinking economies, but deficits and yields of 3-4-5-% and higher. And not to mention unemployment. Creating another 17 Japans? Waiting for OMT programs for Sp and Italy?

      2. @walter, Warren,
        This week we were kindly reminded that the PSI gorilla is still in the room. IMF and some euro members do not support any help for Cyprus and seem to insist on PSI. Others oppose any PSI saying that Greece was an exception. Cyprus got into problems mainly because of the Greek PSI.
        Please note in this context that Cyprus already got loans from Russia. My own impression is that Russia is very eager to make the deal for the gas that Cyprus recently discovered in order to have maximum supply control to Europe.
        Looks to me that if the troika won’t help, Russia will. But then probably the gas will be under Russia’s control. In all cases a PSI for Cyprus looks to me unlikely. Time to buy Cyprus bonds?
        By the way, as far as I hear, in Greece Russia has also shown interest to participate in privatizations, but Brussels does not let Greece.

        With regards to your remark ‘but the austerity can’t end well’:
        – if it ends with blood in the street (as you feared before) you should not have the euro.
        – if they stop austerity and start fiscal stimulus growth will follow, but in the short term the euro may drop significantly. Again better not to have the euro.
        – if it muddles thru, kind of Japan style, then the euro could possibly rise further, but I really wonder how long long such scenario is possible.
        Of course for any currency pair we have to take into account 2 sides, but given the above where do you see currently the ceiling on eur/usd?

      3. Yes, as previously discussed, seems to me it all most likely leads to psi.
        Taxing the bondholders has a way of becoming the path of least resistance.

        Going over the cliff is strong dollar stuff.

Leave a Reply to Jerry Cancel reply

Your email address will not be published. Required fields are marked *