Chart 8 indicates, however, that much of that is attributable to the substantial fall in imports associated with the collapse in domestic demand, rather than a rise in exports (although to the extent that there was excess demand before the crisis – as Chart 4 suggests – part of that decline in imports will be warranted). Moreover, the necessary sectoral reallocation of resources is harder to achieve in a currency union than in a country with its own currency, as the exchange rate is not free to adjust to expedite the necessary adjustments in prices and quantities. Absent a supply-side miracle to  2  As productivity tends to rise faster in manufacturing than services, unit labour costs on average rise faster in non-tradables than tradables. But, as Chart 7 makes clear, the gap was much greater in Spain than Germany. 2  BIS central bankers’ speeches  raise productivity in the periphery, the necessary reversal in the movements in relative unit labour costs needs instead to come about through wage and price adjustment, which may require a sustained period of spare capacity in the periphery together with excess demand in the core. There is, however, an inherent asymmetry, noted long ago by Keynes, that when credit flows dry up, adjustment is compulsory for the debtor but only voluntary for the creditor. Moreover, not only does the creditor lack the urgent need to adjust, they may also feel that the debtor ought to bear more of the burden of adjustment on moral grounds.
Imports and exports of goods have, however, behaved pretty much as expected. For example, the decline in our share of the market for exports of goods appears to have been halted (Chart 2). The real disappointment has instead been in exports of services, where our market share – which had been rising strongly before the crisis – has flattened off, rather than accelerating. A large part of that reflects a decline in the demand for financial services globally as a result of the crisis, but that alone is not sufficient to explain the weakness. Along with the surprising robustness of employment, the disappointing performance of net trade is yet another puzzling aspect of this particular downturn. One possibility is that the lags have  1  See e.g. Bean (2002) and King (2000, 2006). BIS central bankers’ speeches  1  been elongated, perhaps because heightened uncertainty has inhibited the necessary investment to move into new markets. If that is the case, then net exports can be expected to perform better as recovery here and abroad proceeds. But another possibility is that the demand for, and supply of, exports have become less responsive to relative price signals, perhaps reflecting the nature of the goods and services we have a comparative advantage in. That would imply a less optimistic outlook. Let me now venture further afield, to the euro area.