Unfortunately this is will also be spun as ‘austerity works’ as they don’t realize exports are real costs and imports as real benefits, meaning this is in fact evidence of deteriorating real terms of trade.

And, of course, globally it’s a 0 sum game as for every export there is an equal import. But while we can’t all net export, we can all attempt to net export with overly tight fiscal/low aggregate demand/high unemployment etc. in a very ugly race to the bottom.

Additionally, a rise in net exports from euro zone domestic policy comes with upward pressure on the currency that continues to the point where there are no net exports.

That’s why the ‘export models’ include the govt building foreign exchange reserves, as it sells its currency vs the currency of the region targeted for exports. Hence the growing hoards of $US reserves by all the nations targeting the US for exports.

However, the euro zone, unlike Germany under the mark, doesn’t do that for ideological reasons. They don’t want to buy $US and build $US reserves and give the appearance that the $US is the ‘reserve currency’ backing the euro. And so instead of sustaining net exports, the euro goes up to the point where there are no net exports. Note that the euro appreciated from about 85 to 160 to the dollar during its first decade before backing off to under 120 due to portfolio shifting from blind fear of oblivion. And during that time the currency movement always kept net exports in check.

This is all why the ECB doing ‘whatever it takes’ which means conditional funding to sustain solvency while keeping fiscal ‘overly tight’ is extremely euro friendly.

Euro-Area Exports Rose 2.4% in June, Led by Germany: Economy

By Simone Meier

August 17 (Bloomberg) — Euro-area exports rose for a second month in June, driven by a surge in shipments from Germany, as companies tapped into emerging markets to offset declining demand at home.\

Exports from the 17-nation currency bloc advanced a seasonally adjusted 2.4 percent from May, when they gained 0.4 percent, the European Union’s statistics office in Luxembourg said today. Imports stagnated in the period and the trade surplus widened to 10.5 billion euros ($13 billion) from 6.8 billion euros.

Europe’s economy contracted 0.2 percent in the second quarter as tougher austerity measures pushed at least six member states including Italy and Spain into recession. With households and companies across the region cutting spending, exporters such as L’Oreal SA, the world’s largest cosmetics maker, have relied on faster-growing Asian markets to bolster sales.

“The euro-region economy is undergoing a mild recession,” said Alexander Krueger, chief economist at Bankhaus Lampe KG in Dusseldorf. “The global growth dynamic has eased somewhat, but exports will continue to support development to a certain extent in the second half of the year.”

German exports jumped 6.6 percent in June to 40.9 billion euros, while imports in Europe’s largest economy rose 1.5 percent. Shipments from Italy increased 2 percent in the period.
France and Spain reported gains of 1 percent and 1.4 percent, respectively.

8 Responses

  1. The inflows related to increased exports will be more than compensated for by investment outflows to other parts of the world.

    Low aggregate demands in the Eurozone reduces the available investment opportunities which will drive outflows in search of higher returns on capital.

      1. @MamMoTh,
        Only if the future investment income is repatriated to the Eurozone.

        This is doubtful for two reasons: 1) The return will be better if it is reinvested abroad. 2) taxes.

        I think it’s highly likely that the euro will be the fuel for this decade’s carry trade.

  2. Warren, your prediction seems more astute if you substitute the Eurozone with Japan. Like the Eurozone, Japan is following a policy of supressing internal demand in order to maintain net exports. The recent increase in the consumption tax is part of that policy and so is the 7.8% wage cut for civil servants that was passed in February.

    The mainstay in Japanese economic policy has been the supression of internal demand in order to keep its export economy going. This policy was able to function when low interest rates and lack of investment opportunities fueled a carry trade that balanced out export related inflows.

    The difference between the Eurozone and Japan is that Japan has built up large foreign reserves and investments. While this suppressed the yen for a long time, it has now come back to bite them. The increase in the contribution of net investment income flows to the current account balance has made it very hard to maintain their export driven economic model. The Yen is now acting in the way that you predict the euro will act. However the cause of this is net investment inflows, which is precisely what the Eurozone will lack.

    1. seems to me that it’s when Japan stopped buying $ and let the yen appreciate through 100 that exports suffered?
      this was done as a result of the US tsy sec calling them currency manipulators and outlaws etc. under Bush.
      more recently they resumed dollar buying though not yet sufficient to drive down the yen, just to stabilize it

      1. @WARREN MOSLER,

        Their only plan is to regain exports to the USA? Oh, to yen for the golden days of bore!

        Their policy is caught between a crock & a retard spot?

  3. Another economy living on welfare support and no growth !

    Aug. 21 (Telegraph) — George Osborne must deal with the
    shock rise in borrowing with “forceful” efforts to cut red tape
    and approve major construction projects, economists said today.
    The Chancellor is under pressure to rescue the economy afte
    the deficit grew by £600 million, rather than falling by £2.8
    billion in July.
    The public sector finances suffered from a dramatic 20 per
    cent fall in corporation tax from business and a five per cent
    rise in public spending, fuelled by higher benefit payments.
    David Kern, chief economist at the British Chambers of
    Commerce, said the Chancellor must continue with his “difficult
    and arduous task” of reducing the deficit.
    However, he called on the Coalition to put in place
    “forceful policies to boost growth”.
    “This may mean taking some difficult choices in the months
    ahead,” he said. “If the UK is to return to growth, we need to
    see more deregulation, increased infrastructure spending, and th
    creation of a state-backed business bank.”
    Vicky Redwood, an economist at Capital Economics, said the
    Chancellor is now set to “massively overshoot” forecasts for
    bringing down borrowing made by the Office for Budget
    Responsibility (OBR).
    “July’s public finances figures continue the deterioration
    seen over the past few months,” she said.
    “And with the recovery falling well short of the OBR’s
    expectations, we think that the Government will struggle to cut
    borrowing at all next year either.”
    Mr Osborne has demanded that Whitehall and other public
    bodies slash their costs to bring down Government spending.
    However, the UK economy has been hit at the same time by a
    recession sparked by Europe’s debt crisis.
    A Treasury spokesman said there had been “weakness in
    corporation tax, especially from North Sea oil production”.
    “It is still too early in the financial year to draw firm
    conclusions about the year as a whole,” he said.
    “The Government remains committed to the credible plan we
    have set out to deal with Britain’s debts, and today’s numbers
    emphasise how risky it would be to deliberately increase
    borrowing.”

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