Euro Zone: A Long Way To Go

by Andrew Stuttaford

The Economist reports:

Good news out of the euro zone: the euro area ran a higher than expected trade surplus in November of last year thanks to a surge in exports. The bad news? The November surplus was just under €14 billion in an economy with annual output of nearly €10 trillion.

Let’s recall what the euro area is trying to do here. The single-currency area developed a big balance-of-payments problem during the pre-crisis era; capital flooded from north to south to take advantage of higher returns in the fast growing periphery. When crisis struck the capital flooded back, leaving overextended borrowers and overpriced, undercompetitive labour. To service its debts, the periphery needed to flip to running surpluses. Typically, this process would have been facilitated by a big devaluation, but the single currency prevented that. And so instead the euro area has opted for “internal devaluation”: a long period of stagnant to falling wages pushed forward by prolonged high unemployment.

And the steps towards those surpluses are painfully slow . . .

They continue:

Given this incredibly slow progress it isn’t in the least surprising that peripheral countries remained mired in deep recession late last year while unemployment continued to rise. And while it is good news that Germany’s export machine slowed a bit late last year, it is distressing that this slowdown led to an overall contraction in the German economy in the fourth quarter as German domestic demand failed to pick up the slack. That’s very bad news; German consumers need to be gobbling up exports from the south.

It’s nice that financial markets are much calmer, now, than they have been for much of the past three years. But the euro area’s progress is occuring far too slowly. The periphery needs a return to growth and falling unemployment to secure the end of the crisis. The piddly surpluses now generated by the euro area as a whole simply aren’t sufficient to get the job done.

And the longer it takes, well, there’s also this from The Economist:

While Mr Tsipras [the leader of Greece's far left opposition]  was away from Athens a dozen home-made bombs exploded outside bank branches, local offices of [the conservative] ND, and the homes of several Athens journalists. A hooded man armed with a Kalashnikov sprayed bullets into the ND headquarters in the early hours of January 14th. One landed in the former office of the party leader Antonis Samaras, now ensconced in the prime minister’s mansion. Meanwhile, police continued a campaign to expel scores of leftwing squatters from derelict houses in the city centre, a move that some observers believe could have triggered the extremists’ response.

Syriza condemned the attacks, which a government spokesman blamed on “far-left anarchists”, code for extremists believed to have ties with the party’s [further] far-left faction. Manolis Glezos, a veteran left-winger now attached to Syriza, riposted that “para-state organisations friendly to ND” were responsible.