«It’s therefore instructive to look at what’s happened to Greece, Portugal and Spain since austerity was adopted or imposed.
But for their membership of the euro club, these countries would have countered their lack of competitiveness by devaluing their currencies. That’s not possible inside the euro zone so, instead, they’ve been cutting their labor costs in a way that’s been dreadfully painful. So has it worked? Nick Kounis and Aline Schuiling at the Dutch state owned-bank ABN Amro have been delving into the international trade data for June published on Friday by Eurostat, the statistical office of the European Union. And it does appear that the patients are responding to the medicine.
Export growth in Greece, Portugal and Spain has been outperforming, helped by gains in competitiveness following breath-taking falls in labor costs, say the researchers. And their exports will be positive for growth, albeit they are growing from a low base.
The strongest export performances during the period January to May, the latest period for which detailed numbers are available, were seen in those three member states. Leading the pack was Greece, with exports up 8% on an annual basis, followed by Spain (7%) and Portugal (4%), whereas in many core member states exports stabilized or fell. As the researchers say, these numbers are far from surprising. “Indeed, they actually sit rather well with spectacular shifts in competitiveness that have been taking shape over the last few years. Wages in the periphery have been falling sharply, while productivity has been accelerating, helped by the combination of severe recessions and structural reforms,” they said.
Looking at this in more detail, European Commission data on relative cost competitiveness within the euro zone, measured by unit labor costs in the manufacturing sector, show that Greece (around 25%), Spain (15%) and Portugal (10%) have all seen remarkable falls in the their relative labor costs compared with their peak levels, following sharp falls over recent years.
This, said ABN Amro, has left relative costs in Greece and Spain only around 5% above the levels seen at the start of the single currency era, while Portugal’s are already below those levels.
So it does seem that all the pain could prove worthwhile in the end, and that the economists who wrote the textbooks weren’t so out of touch after all.»
Martin Essex, A Textbook Recovery Outside Euro-Zone Core, MoneyBeat, WSJ