This is a great summation of what is happening economically in the EU, from the Economists Free Exchange blog:
Let's recall what the euro area is trying to do here. The single-currency area developed a big balance-of-payments problem during the pre-crisis era; capital flooded from north to south to take advantage of higher returns in the fast growing periphery. When crisis struck the capital flooded back, leaving overextended borrowers and overpriced, undercompetitive labour. To service its debts, the periphery needed to flip to running surpluses. Typically, this process would have been facilitated by a big devaluation, but the single currency prevented that. And so instead the euro area has opted for "internal devaluation": a long period of stagnant to falling wages pushed forward by prolonged high unemployment.
High unemployment is the flip side of the macro choices begin made by peripheral governments. Domestic demand is bound to remain low thanks to unproductive labour and attempted deleveraging. Governments are also pulling back, further shrinking domestic demand. That leaves external demand as the only means to power growth. Unemployment will stay high until wages fall enough to support the huge surpluses needed to spark growth and hiring.
But we all know the rub: euro-area members' biggest trading partners are...other euro-area members. Member states can't all simultaneously raise net exports to other member states. So unless the northern core begins running big surpluses vis-a-vis the periphery, rising external demand means rising surpluses with the world outside the euro area.
As the latest data make clear, that is occuring. In the year to November of last year euro-zone exports were up 8% relative to the same period in 2011 while imports rose just 2%. The euro area's surpluses with Britain and America increased by nearly €13 billion and €14 billion, respectively, in that time, and its deficits with China and Japan dropped by €10 billion and €8 billion, respectively. But these figures, while directionally appropriate, are tiny relative to the output boost needed around the periphery. And neither is it clear that much of the gains are occuring around the periphery. Greece, Spain, and Portugal were running smaller trade deficits last year than in 2011, but not by that much—gaps shrank roughly €6 billion, €12 billion, and €5 billion, respectively. Meanwhile, Germany's surplus expanded by €19 billion.
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