Mar 7, 2012

EU Credit Crunch Takes its Toll on Exports Despite Weak Euro

As released by Eurostat yesterday, the Eurozone and EU GDPs for the fourth quarter of last year dropped into negative territory. Looking at the components of the calculation, exports were down -0.4%. This was during a period when the EUR had weakened considerably against the dollar in the aftermath of the S&P downgrade of the US and subsequent equity markets sell-off. Usually a weaker currency should boost exports rather than dampen them. Also throughout Q4 the economies of
China and the US - EU's largest trading partners were relatively strong.

The drop off in exports in such an environment is probably due to the scarcity of trade finance. Without easy access to credit to finance shipments, both export and import will be be subdued. (Additionally trade insurance would probably become more expensive in a risk-off environment). Similar to the "Lehman shock" in the US in 2008,  a crisis which started out as purely financial has affected the business cycle of the real economy. This is likely to prolong the EU recession that the markets are already pricing in.

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