It’s a lie Eurozone isn’t competitive

Press conference by Karel De Gucht, Member of the EC, following the latest negotiations on a free trade agreement between the EU and Singapore

Press conference by Karel De Gucht, Member of the EC, following the latest negotiations on a free trade agreement between the EU and Singapore

Yesterday a press release of Eurostat, the statistical service of the European Union, revealed that during the third quarter of 2012 Eurozone recorded a positive foreign trade balance in goods of the order of €30.5 billion. It’s even more interesting however that during the same period the balance of trade in services left an impressive surplus of €26.8bn. As a result from 1 June 2012 till 31 August 2012 the current account surplus reached €41bn. To note that the current account covers all transactions and refers to international trade in goods and services, incomes and current transfers.

Competitive exporters

This excellent performance of the Eurozone’s economy in world markets however is not an exception. The sum of trade balances in goods and services has being positive for Eurozone for many years in a row. And this is true even during the past four difficult years. As every first year student of economics knows an economy that produces regularly such surpluses in its foreign trade in goods and services, is not only healthy but also very competitive.

Then why an unholy alliance of people like the European Central Bank governor, Mario Draghi, the European Commissioner in charge of Finance Ollie Rehn, the International Monetary Fund general manager Christine Lagarde, and many prime ministers of Eurozone countries keep telling us that Eurozone is not competitive enough?

Let’s stay to facts. According to a very basic economic theory, competitiveness is the outcome of high productivity. Obviously a producer who can offer high quality goods and services at low prices is very competitive. Now as everybody knows productivity is a property that can be attributed only to persons and is defined as the fraction of the value produced divided by the worker’s wages. That is production value over wages. Consequently productivity may increase either by increasing the numerator (the value of production) or by decreasing the denominator (wages). Either way it’s the worker who has to bear the pressure working more for the same wage or accept lower pay or both.

Make the real economy pay

In short all that literature about Eurozone not being competitive and productive enough aims to convince us all working people, to either work more or get less. In this logic government spending on health, pensions, education and social protection is considered as indirect labour cost and need also to be cut down, if the economy as a whole is to become more competitive.

Reality however is in complete contradiction with this logic. The European economy with the most well paid workers in the world is at the same time most competitive, because it produces steadily large surpluses in its trade with the rest of the globe. And countries which export more products and services than what they import are considered as highly competitive. Germany, Ireland, Holland, Austria, Finland even Italy are perfect example of that.

Another proof of Eurozone’s high competitiveness is the parity of the euro with the American dollar and the English pound. It steadily favours the single European money, even at the worst moments of crisis. Obviously the European foreign account surpluses are the best support for the external value of the euro.

Why then all those European dignitaries want to convince us that Eurozone is not competitive enough? After this little theory the answer is that they are all wrong. All those surpluses in the foreign trade of goods and services stand witness that Eurozone is competitive enough.

Yet Mario Draghi, Ollie Rehn and many more EU dignitaries and politicians insist that Eurozone has to be more productive? The answer is very simply, that more real trade surpluses are needed to cover the financial sector’s huge black holes by having accumulated toxic assets. As a result in order the euro to retain its value and the Eurozone not to fall in an inflation vicious cycle the real economy that is working people, have to produce even more goods and services.

The inflation danger obviously comes from the free print of money by the European Central Bank to replenish the coffers of bankrupt banks. ECB not only bought at face value the toxic assets (loans) of the major European lenders, but also lent them trillions at almost zero interest rate. According to Commission’s estimates over the past five years Eurozone banks have received €4.5 trillion in financial support. Almost all that money was freshly printed by the ECB and if Eurozone is to stand in its feet, it has to turn out more products and services to sell to the world. Otherwise inflation would destroy us all.

In one word, it’s not Eurozone’s people that are not competitive enough. It’s the banks that cannot be stopped from spinning around other peoples’ money. When they win their bets it is profit for them, when they lose it is crisis for us.

 

 

 

 

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