EMU Surplus Rises as Flow Growth Slows

Growth slowdowns in EMU are choking off imports faster than exports are being slowed to outside the region. Over three months exports are weak on broad based weakness. But for imports the weakness stretches back over a year.

Manufactures exports fight that trend and are still advancing over three-months, six-months and twelve-months. But imports of manufactures are dropping over all these horizons and are contracting at a 7.5% annual rate over three-months.

There is still a good deal of irregularity across the Zone in terms how trade performance is faring. Germany shows imports faster than exports by wide margin over 3-months and imports outpacing exports over 6-months and 12-months as well. In France import growth is much faster and has been much faster compared to exports consistently for a year. But French exports are being squeezed and are falling over three-months and six months. In the UK, a country that is not a member of the common currency, both exports and imports are falling sharply in April and both are falling over three months with imports falling slightly faster. Year-over-year UK import growth is still ahead of export growth.

With the Greek vote on tap for the weekend there is a possibility for further negative shocks. While central banks have maneuvered to try to offer buffers against the prospect of bad news, it is cleat the banks not quite sure what to expect and so have made vague assurances of the backstops they might provide. There is hint that one of the things that might emerge from the G-20 meeting is to relax the oncoming strictures of new BIS rules. European banks in particularly are having trouble raising enough capital. New rules to tighten those standards further have been viewed with trepidation in Europe for some time. While procrastinating on the implementation of that rule should be a helpful move for banks, it is totally separate from the concerns that exist in Europe now over the country debt problems. Certain EMU member countries already think that they might be better off if they were not EMU members. There is nothing on the table to assuage such thinking. At least one Greek party plans to exploit those concerns if it dominates the Greek elections.

Being uncompetitive is the one of problems that is not easy to solve while maintaining membership in EMU. Staying in EMU is a choice with multi-year adverse consequences for countries that are over the competitiveness barrel. And there is little hint how EMU might be able to deal with that. So far the remedy has been to push for structural change and austerity. This is a very painful process. To me it is the one issue that continues to make every single plan I seen mooted look like a failure. I don’t think there is a magic bullet for it and Europe does not even seem to be trying to solve it. All the solutions so far are aimed at financially too-indebted governments and at buttressing banks. While these are important goals for Europe’s survival in the short run, none of these provides the fix to stabilize EMU by making membership clearly more alluring than departure. As long as that is true we will continue to see things boil over in Europe, growth will slow and trade flows will continue to shrink.