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Warren Mosler

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Euro Exports Up as Austerity Drives Real Terms of Trade Down

Posted: 08/20/2012 12:46 pm

For a second month, Euro-area exports rose in June, driven by a surge in shipments from Germany, as companies tapped into emerging markets to offset declining demand at home. Exports advanced a seasonally adjusted 2.4 percent from May, when they gained 0.4 percent and the trade surplus widened to 10.5 billion euros ($13 billion) from 6.8 billion euros.

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 zero 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, selling its currency versus the currency of the region targeted for exports. Hence the growing hoards of U.S. reserves held by all the nations targeting the US for exports.

However the euro zone, unlike Germany under the mark, for ideological reasons does not buy U.S. reserves. They don't want to buy U.S. and build U.S. reserves and give the appearance that the U.S. is the reserve currency 'backing' the euro. So instead of sustaining net exports with U.S. buying, the euro is left to appreciate 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, which fulfills the ECB's single mandate. And very unfriendly to 99% of the people who live there.

 
 
 

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