Spain could really stand to increase its net exports. Part of the idea of Spanish austerity budgeting is to achieve “internal devaluation” and do this. But unfortunately for Spain, the largest market for Spanish exports is France, which is implementing austerity and seeking to hike its net exports. Number three on the list is Portugal, which is implementing austerity and seeking to hike its net exports. Fifth up is Italy, which is supposed to implement austerity and seek more net exports. Italy’s second-largest export market is France and number three is Spain. France’s second-largest export market is Italy and Spain is number four. Portugal’s number one export market is Spain, and France is number three. In other words, austerity in Spain is likely to hurt Italy and austerity in Italy will hurt Spain. Both of those countries will also be hurt by austerity in France, and France will be hurt by Spanish and Italian austerity. Portugal is set to be absolutely crushed by austerity in Spain. And all of this economic pain will induce the need for additional austerity measures, further deepening the cycle.
Germany is a little bit less exposed to negative demand shocks from the south, but France is it’s number one export market and Italy is number five. Meanwhile Germany is Italy’s number one export market, France’s number one export market, and Spain’s number two export market. So if austerity on the rim manages to push Germany into even a slight recession, the drag on the romance language belt will be severe.
Structural reforms and demand-side stimulus are sometimes pitched as alternative strategies, but I think the reality is that Europe will find it exceedingly difficult to actually enact competitiveness-enhancing reforms while being constantly buffeted by a cycle of negative demand shocks.