Tuesday 11 October 2016

Is MoU-induced trade balance adjustment sustainable or not ?

Some of the issues that were supposed to be addressed by the MoUs in different EU/EZ countries were structural competitiveness issues. With most countries having graduated from their financing programs maybe it's time to judge whether this objective was fulfilled or not.

Hereby I will take a look at Latvia, Portugal and Cyprus that have all graduated from their respective programs. 

One of the features of all the aforementioned countries was that, during the previous decade, as their output gaps became increasingly positive, their trade balances became increasingly negative. Now, in all cases, output gaps have either started to become less negative (Portugal and Cyprus) or are in positive territory (Latvia).

Hence one way to judge whether structural competitiveness issues have been addressed is to see whether these positive developments regarding output gaps are being accompanied by trade balances moving in the opposite direction again or not. If the answer is no, maybe something akin to a paradigm change has taken place and a critical mass of firms has become more export-oriented.

In Latvia's case, the output gap is now positive and after a hiccup in the first year, the country's trade balance seems to be moving in the same direction (not positive that is, but narrowing further).

source: AMECO, own calculations

In Portugal's case, the output gap has started to narrow but the country's trade balance has not turned negative as a response to that. 

source: AMECO, own calculations

Finally, in Cyprus' case, the output gap has started to narrow as well but the trade balance seems to be moving in the opposite direction for the time being. Time will tell if this will prove to be a case alike to Latvia's first year of return to growth or not.

source: AMECO, own calculations

To wrap this up, as far as whether structural competitiveness issues are concerned, indications are positive for Latvia and Portugal but not so much for Cyprus.

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