The Germanification of Spain?

Posted: June 6, 2013 in Eurozone Economy, Germany, Spain
Tags: , , , , , , ,

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Good news, it appears, comes in threes. For Spain, it most certainly has been a hat-trick, and we are talking football. If you like your forecast to be made via the prism of half-full crystal balls, then this may be reason to celebrate. Cynics may think differently, however.

Firstly, an index out earlier tracking Spanish manufacturing hit a 24-month high. The latest Purchasing Managers’ Index (PMI) for Spanish manufacturing and compiled by Markit hit 48.1 in May. Now that is news to please both pessimists and optimists. The optimists are celebrating because that was the highest reading since May 2011, and before Spain was in recession. The pessimists remain glum, however, because any reading under 50 is meant to correspond with contraction.

In other words, Spanish manufacturing is still shrinking, it is merely doing so at a slower rate. But then things don’t turn around overnight. The trend has been clear for some: the Spanish manufacturing PMI has been steadily improving. If the upward trajectory continues, then that will be bona fide good news.

Secondly, Spain posted its first trade surplus ever in March. Or at least it was the first surplus for as far back as the records go. Exports jumped 2.7 per cent, perhaps supporting the findings of the PMI. On the other hand, imports fell 13 per cent, that was the main factor behind the trade surplus, and is it really a good idea to celebrate the fact that Spanish households are so under the cosh that they can’t afford to buy foreign goods?

Thirdly, Spanish unemployment fell in May, with 98,286 joining the Spanish work-force. That is good news, of course it is, but not wishing to rain on Spain’s parade, it should be pointed out that Spanish unemployment is currently 26.8 per cent. So Spain needs to see several million more jobs created before it can celebrate. In any case, the main factor behind May data was the tourism trade, and that is seasonal, meaning May’s boost may prove to be a one-off.

Looking at the bigger picture, it does rather look as though Germany is now exporting its economic model to Spain, and there are some parallels between Spain today and Germany during the early stages of the Schroder reforms.

You may recall in the late 1990s and early noughties the German economy looked a lot like Japan, a once seemingly unbeatable economic machine appearing all beaten. But Gerhard Schroder, then Angela Merkel made tough reforms. They hurt. German wages fell;corporate profits in Germany rose. Right now, many Germans are unhappy about bailing out the rest of Europe because they see no sign that indebted Europe is willing to make the kind of sacrifices they themselves made ten years or so ago.

But is the so-called Germanification of Europe such a good idea? The result of rising German company profits was, in fact, a substantial rise in Germany’s savings, and as investment did not rise in tandem with savings, the result was German money flooded abroad, boosting asset prices in, among other countries, Spain.

The global economy, perhaps even Europe, cannot afford to see a rise in planned savings without a corresponding rise in investment. For the global economy, savings must equal investment. This is an economic truism. If savings rise, but investment does not, there must be an immediate offset. Either some sectors of the economy must run up debts equalling the short fall between savings and investment, or the economy must contract.

Either way, aggregate savings must equal aggregate investment. Germanic economics, when applied globally, may lead to global recession, even depression.

© Investment & Business News 2013

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