Comment: The competitiveness challenge for the eurozone

The thing about deleveraging is that when it happens “en masse” countries suddenly find that the only route for economic growth is external trade.

For eurozone peripheral countries this is especially difficult when they are being asked to deliver increasing fiscal austerity and reforms that sap the purchasing power of firms/households and at the same time suffer a competitive disadvantage.

Being a zero-sum game an improvement in the trade (or c/a) position of one country has to lead to a deterioration in the trade position of another country. While we have talked about global imbalances problem (the uneven distribution of c/a deficits and surpluses) there has not been much focus on the imbalances problem within the eurozone.

At the heart is the fact that Germany enjoys a surplus which continues to dominate and shows little sign of moving lower even as other eurozone countries look to improve competitiveness.

If there is a lesson that Greece can teach Portugal it is that it is better to restructure debts early even if a second bailout for Portugal does not require PSI

The trade balance for Germany for 2011 recorded a surplus of €158bn with exports growing a record 11.4% and the value of exports was greater than €1trn for the first time. This is an incredible achievement but contrast this with a county like France which yesterday reported a record trade deficit of €69.7bn after a deficit of 51.4bn in 2010.

Germany shows little sign of an export machine that is looking to move in reverse. Even if German trade surplus does come down, it is not guaranteed that other eurozone countries will see their deficits decline.

The importance of the trade (or c/a) deficits for the peripheral countries is that while in the past the deficits were easily financed in the current climate this is not easy with investors less willing to plough money into some countries (especially the bailout trio). Ireland has managed to record c/a surpluses and this is what has allowed it to separate itself form Greece and Portugal.

We still find it difficult to see how Greece and Portugal cannot avoid continuing to go back to the table for more bailout funds. If there is a lesson that Greece can teach Portugal it is that it is better to restructure debts early even if a second bailout for Portugal does not require PSI.