The Strange Case Of Diverging Spanish Exports And What It Means For Europe

Tyler Durden's picture

As we have been warning for over half a year, and as conventional wisdom has finally caught on, the economy most impacted in Europe by the recent surge in the EUR exchange rate (not because of an improvement in the economy but due to wholesale engineering of asset prices by central banks) is the one that has so far been able to keep it all together - Germany, the same country where Angela Merkel last night suffered an embarrassing last minute loss which may be a harbinger of things to come should Germany slide deeper into recession. This, as also noted repeatedly before, is part of the grand paradox in Europe: unlike every other central bank in the world, the ECB's interventions achieve only one thing: to push the EUR higher, in the process stabilizing secondary market indicators (bond prices, the DAX, swap spreads) but destabilizing EUR-denominated exports. And while the adverse impact on core exporting countries from ECB intervention is by know understood by everyone (and this is ignoring the impact of potential inflation as a result of fund flows to the few safe regions in Europe), few appreciate just how big the EUR impact on the periphery is as well. The chart below from the Spanish economy ministry showing the recent stunning divergence of Spanish exports, should explain why a low EUR is good for not only Germany, but certainly the PIIGS, in this case Spain. And vice versa.

Below are Spanish exports and imports broken down by trading counterparty: EU; non-EU and Total:

What is immediately obvious is that when it comes to imports and exports between Spain and Europe, primarily the Eurozone, but also all EU countries, the trade situation is about as abysmal as ever, posting a decline compared to 2011, and about the worst on a Y/Y basis since 2009. And yet the total export number is not quite as bad. Why? Courtesy of the yellow line showing exports to non-EU27 countries. It is here that exports have soared to previously unseen Y/Y levels, and which have managed to keep export growth in Spain sustainable. Exports driven exclusive by a weak Euro currency.

With imports declining rapidly because of the far less organic demand in Spain for foreign goods and services (not to mention domestic) courtesy of 26% unemployment, it is this trade surplus that has had a much needed and beneficial impact on the current account situation in Spain.

Alas, the benefits to Spain, not just Germany, from the very weak Euro which has soared since the 1.2000 "Draghi bottom" in July 2012, are now ending, and as the chart below shows, in November Spain just posted its first Y/Y decline in Exports following months of increases: only the second such decline in 2012, and amounting to 0.6%. This compares to a 7.4% increase in exports in November 2011, when Europe did have the benefit of a currency whose strength was rapidly deteriorating .

And just in case there is no confusion about what the internal European demand for Spanish products was: demand that represents some two thirds of all exports, it is shown below: a 10% drop in Spanish exports to other EUR countries, offset by a 15.5% to non-Eurozone European countries, and a surge in exports to North America, Africa, and less to Latin America and Asia - all places that prefer a EUR that is:

a) stronger?
b) weaker?

One thing is unmistakable: Spain deserves as much of its GDP and current account boost (not that it is positive mind you, just that both would be far, far worse had it not been due to the EUR crush mid year) to the weak EUR exhibited in the mid- to late-2012, as it does to all other ECB interventions, paradoxically meant to strengthen the EUR!

And it is here that the supreme irony of Europe resides: because very soon Spanish exports to the rest of the world will tumble as its goods and services are no longer competitive courtesy of a 1.33 and rising EURUSD, and with the core of the Eurozone now so weak (recall German GDP just dipped to under 0%) and irrelevant what the level of the EUR is (as everyone in Europe uses it) to not be able to offset the decline in non-European exports, Spain will once again become the focal point of everyone's attention.

This will force yet another ramp up in TARGET2 liabilities, forcing an even bigger drop in Spanish GDP, and finally, forcing a return of the Spanish bond vigilantes, all of which leads to, drumroll, another spasm in the European crisis, one that culminates with a plunge in the EUR, and a need for the ECB to step in and bailout the Eurozone and its currency once more.

Of course, this analysis excludes the impact of the ever plunging Yen - something which forced none other than BUBA head Jens Weidmann to publicly admonish Japan against engaging in currency warfare a few short hours ago, and whatever other currencies soon join the fray of devaluation, which will ultimately have just one impact on Spanish, German and other European exports: negative.

The take home here, however, is simple, and is becoming so clear, even a caveman Econ Ph.D. gets it: where other countries can and will engage in currency warfare in an increasingly more hostile manner, all rhetoric aside, it is only Europe, and its fake currency, that has central bank intervention occur to prop up the currency, not to push it lower! It is this complete outlier nature of the Eurozone to the rest of modern central banking that will ultimately be its downfall, as while in a zero sum world everyone can devalue in stepwise increments, it is the party with the inverted incentives - the ECB - that will be the short circuit of all plans to gradually at first, then very rapidly devalue all currencies against all other currencies, and then against hard assets.

Sorry Europe: your crisis is nowhere near over. In fact, it is about to start all over again. But at least Germany is taking the proper steps to ensure that when it all ends up going horribly wrong at least it will have some gold to fall back to. What about all the other countries in Europe: who has their gold?