Thursday, 10 July 2014

Why Draghi put lipstick on the PIIGS

In London yesterday, Draghi made a speech in which he advocated more centralised control over "structural reform" (liberalizing labour and other markets) for members of the Eurozone.  

In making the case that structural reform would be a good idea, Draghi implicitly relied on the badly misguided idea that it's feasible to generalise the German model of wage suppression and export-led growth. And to make this case, he said something demonstrably misleading:
[W]e have seen the improvement that has taken place when governments implemented reform. The change in current account positions in stressed countries ranges from an almost 11 percentage point correction of GDP in Spain to a 16 percentage point improvement in GDP in Greece [clearly since 2008-DW], only part of which is explained by lower imports in the context of a recession.
So, "current account positions" is exports minus imports (trade balance) plus some other stuff not very important for these countries. Draghi is claiming that trade balance in the "stressed countries" (presumably the PIIGS minus Italy) is improving not just because imports are sinking because people are too poor to afford them, but also because exports are increasing. This is supposed to substantiate the idea that export-led growth is a reasonable model.

It's not, and a closer look at the two countries Draghi cited proves it.  (Data for the claims below come from here and you can find my calculations here.)

For Greece, Draghi's claim is not even true. Greek exports are still below what they were in 2008, even in nominal terms.  Greece's trade balance in 2008 was -14.5% of GDP; if there had been no fall-off in imports it would been -20% of GDP instead of the -2.6% it actually was in 2013. (It's a tiny bit less misleading if you were to start in 2009 instead of 2008, but even over this period the rise in exports was less than a third of the fall in imports).

For Spain, what Draghi said was true. The rise in Spanish exports over this period was more than double the fall in imports. But the idea that this is a promising sign of a shift to a new sustainable model is laughable.
  • Over the last five years, increased exports have replaced only 40% of Spain's loss of domestic demand
  • Since 2008, Spain's exports have increased in nominal value at 4.91% per year. At this rate, even assuming domestic demand stops falling, Spain can expect to have replaced its lost domestic demand half way through 2020. 
  • Most of the gains in Spanish exports were actually in 2010-2011. More recently exports have been growing at 4% a year -- fast enough to replace lost domestic demand in the first quarter of 2022.  
Even in the better case for him, Draghi is touting as vindication trends that amount to a recipe for not just a lost decade, but a lost 12-14 years (even in nominal terms).  Impressive.

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