BERLIN - During Italian Prime Minister Mario Monti’s recent visit to Berlin, the conciliatory tone of voice German Chancellor Angela Merkel used was notable. She went out of her way to praise her Italian visitor’s reform agenda and the impressive savings that have been made -- saying Italy’s efforts could help the entire euro zone become more competitive.
Not long before that, Merkel had received a visit from Greek Prime Minister Antonis Samaras – and they got along so well that classical music lover Merkel even dropped attending the Berlin Philharmonic Orchestra’s first concert of the season to spend more time with him.
Good vibes instead of hard-nosed calls for austerity: now there’s something out of the ordinary in Berlin’s relations with the euro crisis countries. And the reason for the more relaxed mood could well be the latest batch of statistics. If the numbers are right, the European crisis countries are apparently healing faster than the markets have realized -- or want to realize.
An astonishingly positive total picture emerges from the various statistics. The economies of the euro zone’s periphery nations are more competitive than they were just a few months ago; their industries are selling more abroad, and trade deficits are narrowing.
"Blood, sweat and tears -- everything people in these economies have been through is paying off," says Bert Colijn, a jobs market expert with Conference Board, a private economic research institute." The competitivity of the crisis countries is improving, and these first signs of improvement are encouraging. The periphery countries are moving in the right direction."
One look at export figures shows how strongly trade disparities in the euro zone have shrunk. Even before the financial crisis, the periphery countries had been suffering high trade deficits for years. Consumer tastes drove these economies to import more than they exported. In Greece, the trade deficit before the crisis was a fifth of economic output; in Portugal it was 13 percent. The periphery nations of the euro zone were living above their means and accumulating debts abroad.
Stronger than reported
And that’s changed now. "The trade balances of the southern euro zone countries have improved significantly," says Jürgen Matthes, a trade expert at the Cologne Institute for Economic Research. "The change is much stronger than is mostly reported."
A case in point is Spain: the 10 percent trade deficit is nearly all gone, and in the first quarter Spain’s economy even showed a light surplus in trade with the rest of the world. Portugal has been able to get its deficit down by two-thirds over the past four years to 3.2 percent of economic output. And while Greece’s progress has been less extreme, it has nevertheless halved its deficit.
Holger Schmieding, chief economist at the Berenberg Bank, explains the successes in terms of sheer necessity: because consumers in crisis countries are buying less and the government is saving, industries have been forced to focus on other euro zone markets or seek new customers outside the continent.
One of the countries they’re turning to is Germany. Five years ago, German companies were selling a lot in other euro zone countries, but the interest of German consumers for goods and services from those countries trailed far behind.
The result was a trade surplus of over 5 percent of German economic output. Since, the surplus for trade with the rest of the euro zone has shrunk to 3 percent. Analysts at Moody’s rating agency praised the development: "Adjustments, both in the periphery and the core, have already taken place -- in some cases, to a significant degree.”
The fact that crisis countries, with the exception of Greece, are doing more business abroad is a major driving force for development. In the last year, growth of exports from Spanish and Portuguese companies was as fast as it was for German firms. And growth for Italy was not far behind. External imbalances of the periphery countries initially shrunk because of fewer imports, but increasingly growing exports are responsible for a sustainable improvement in trade balance.
Portugal and Ireland, "Pigs" no more?
The weak euro has helped the crisis countries by making their goods cheaper for buyers outside the single currency zone. Portugal for example was able to make up for the business it lost in Europe and Spain primarily by doing business with overseas buyers, says Gilles Moec, the lead Portugal analyst at Deutsche Bank. Two countries stand out: the former Portuguese colony of Angola, with which Portuguese companies have been doing significantly more business, and China, to which the Volkswagen plant in Palmela (Portugal) has been selling more cars.
A decisive reason for these export successes is that crisis country economies have become more competitive. One particularly salutary development is cheaper labor costs. In Ireland, Spain and even Greece, unit labor costs have fallen significantly over the past few years. Conference Board economist Colijn and his colleague Bart van Ark researched that development, and report that of all the euro zone countries, the one that has increased its competitivity most is Ireland. Unit labor costs in Irish industry have fallen by 41.5 percent since 2008, which means that labor costs in Ireland are lower than they are in Poland and other middle and eastern European countries.
It will take time before lower unit labor costs produce full effects, but already they have made goods from those countries cheaper. In the long run, it will make them more interesting to investors.
At the moment, however, uncertainty about the future of the monetary union is keeping companies from investing. Only when they start investing again can the results of lowered costs bear its real fruit in creating growth and jobs.
If things work out the way the reformers want, the upswing will be stronger – and will create more jobs -- than previous upturns. In Spain, that should happen next year. "The economies in the euro zone periphery countries still have some catching up to do," says Berenberg chief economist Schmieding. "But when they do, they will exceed expectations."