Weaker euro helps Spain and Italy, not Germany

 

Germany is the champion of exporters, but it may not be getting as much of a boost from a newly weaker euro as advertised - indeed, there is evidence that the bigger beneficiaries could be the troubled economies on the euro zone periphery.

Thomson Reuters data shows that German exports do not receive the boost of demand that do products from places such as Italy and Spain when the single currency is weaker.

It all comes down to what you are making - higher-end German products that cannot readily be substituted or more price-elastic lower value goods from the periphery nations.

The euro has fallen by 12% against the dollar in 8 months since May 2011. Even with a modest recovery in recent weeks, it is still 7% lower than it was three months ago.

The broader trade-weighted exchange rate is down 4 percent in the past three months, according to ECB data.

So trade-driven Germany, which sells nearly 30% of the goods the European Union exports, would be the obvious winner.

Add to this the fact that Germany has a larger share of its customers outside the euro zone than many other bloc members.

It ships 60% of its exports to countries outside the currency zone, just behind Greece and Ireland on 61%, but ahead of Italy (57), Spain (45) and Portugal (36), according to Eurostat data from January 2010 to October 2011. The euro zone average is 51%.

Yet Germany's export performance appears to be far less dependent on the euro's fluctuations.

According to Thomson Reuters Datastream, there is a tight negative correlation between the balance of payments of periphery nations and the dollar/euro exchange rate.

In simple terms, this means a stronger euro tends to depress trade of these countries and a weaker currency boosts it.

The relationship is strongest for Spain and bailout recipient Ireland, followed by Greece, Portugal and Italy. France too has a strongly negative correlation and many other euro zone countries show similar, but weaker links between their trade balance and the exchange rate.

It is different in Germany, where the relationship is positive, meaning there is no trade boost from a weaker euro.

QUALITY CHECK

None of this detracts from the fact that German is far and away the most potent exporter in the bloc, putting all others in the shade. But it does suggest that getting a boost from a weaker currency is not as obvious as it might seem.

The difference appears to be due to how far a country's products are up the value chain.

Consumers or businesses may still buy a special German drill bit or a Mercedes, even if the price in their currency rises by 10%.

But lower value products from the periphery, such as textiles, may be competing more on price globally, with far more elastic demand.

This would also explain why the Netherlands and Austria have positive correlations.

A country also does not need to be exporting its goods outside the euro zone to benefit from the single currency's weakness. It can simply be competing more effectively with imported products.

"For Italy, it has products more sensitive to exchange rates because they are more easily substituted - textiles, consumer goods, fashion items, clothing, shoes," said Unicredit economist Marco Valli.

The oil price, denominated in dollars, may also play a role. It has clung to around $110 per barrel in recent months, so in euro terms has clearly risen.

France, which imports only about half of its energy needs, suffers less than its counterparts, which may explain in part why there is a close relationship between the euro's strength and its current account balance.

The weaker euro, meanwhile, is already working its magic on some peripheral economies.

Italy posted its first trade surplus with non-EU countries for two years in December, according to data released on January 24.

And Greece registered a 43% jump in overall exports in the period January-October from a year earlier, although less than 5% of the total was to countries outside the European Union and it remained in overall deficit.

"Greece and some other countries are also seeing some internal devaluation, which would increase the cost advantage," said ABN AMRO economist Nick Kounis.

Despite the potential gains, exports are still only a low share of the economies of peripheral euro zone members.