Posted by: Dirk | November 14, 2012

The periphery just got bigger

The Autumn Forecast of the EU Commission features the following graph:

One could argue that the periphery just got bigger, with Finland turning into a deficit country, too. Many economists argued that the countries in crisis must find ‘the next Nokia’, and then would return to their growth path. However, finding the next Nokia is not easy if demand in all countries is shrinking and exports start to fall across the region. As was said before, the Scnadinavian financial crisis of the early 1990s was not so deep because these countries had an exchange rate, which as a result of the crisis could and did depreciate, thus making imports more expensive and exports cheaper. This helped to restore employment.

Now, Finland is part of the eurozone and therefore cannot change its exchange rate or have it changed by markets. This is not true for Sweden, which has not joined the euro and instead pumps Swedish crowns through its economy. The Swedish crown went up against the euro in recent years. Like Nokia in Finland, SAAB and Volvo of Sweden had problems in the last years that probably harmed exports. Let us have a look at the picture of Sweden:

So, Sweden would have the option of a depreciation of the exchange rate, but it doesn’t need it right now because exports are running at a positive level. Nevertheless I wouldn’t trust the forecast of the European Commission because their were wrong many times. Here is a look at the forecasts for Greece over time:

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