Blog Post

The German trade surplus may widen with the euro-area recovery

An increased demand for German exports may well lead to an increased overall German trade surplus, unless German domestic demand increases significantly.

By: Date: November 7, 2013 Topic: Macroeconomic policy

The German current account surplus has given rise to much controversy following the recent US Treasury report, which criticised Germany for its persistent surplus (see yesterday’s Bruegel Economic Blogs Review). Let me contribute to the debate by showing two charts on German and Spanish trade developments, which suggest that the German trade surplus may widen further when the euro area’s cyclical position improves.

Bilateral current account balances between countries are generally not available, but bilateral trade balances of goods are, which account for a significant portion of the current account balance in Germany and Spain. Here is the geographical composition of the trade balances of Germany and Spain:

Chart 1: German and Spanish trade balances with different regions (% GDP), 1999Q1-2013Q2

Sources: Monthly seasonally adjusted trade balances of goods: Eurostat (“Member States (EU27) trade by BEC product group since 1999 [ext_st_27msbec]”). GDP: Annual current price GDP: AMECO.

Note: We converted monthly trade balances and annual GDP figures to the quarterly frequency. Before calculating the trade balance/GDP ratio, we filtered the GDP series with the Hodrick-Prescott filter (with smoothing parameter 1). Thereby, short-term fluctuations in GDP do not impact the trade balance/GDP ratio we report. In a post last year I showed an earlier version of this chart using annual data up to 2011.

By 2013, Germany’s trade surplus and Spain’s trade deficit with the rest of the euro-area have been eliminated (Spain has a small surplus with the euro area now). At the same time, Germany could increase her surplus with non-EU countries, which helped to keep the overall trade surplus at a high level. The big question is the cause of this increased surplus with non-EU countries: was this just the result of a substitution away from the euro area to the rest of the world at a time when demand in the euro area plummeted? Or has weak German domestic demand played a major role?

A well specified macroeconomic model could help to answer this question, yet we can get an intuition by plotting German export and import data.

Chart 2: German exports to, and imports from, different regions (% GDP), 1999Q1-2013Q2

Source: see at the previous chart.

With respects to euro-area partners, both German exports and imports have declined significantly during the past three years, reflecting the falling demand in the euro area. With respect to the ten EU countries outside the euro area, there was a small decline in both exports and imports during the past three years, yet it is remarkable that the German trade balance as a percent of GDP has not much changed during the past 5 years, as indicated by the first chart. The economic situation in these ten countries was diverse (e.g. compare the UK and Poland), but on average was somewhat weak, though not as much as in the euro area.

The most interesting panel is the third one, which shows that German exports to countries outside the EU have increased rapidly, but German imports from these countries have fallen recently. This suggests that weak German demand should have played a role.

Going forward, there is a risk that the German trade surplus may widen further. As highlighted by Wolfgang Münchau in the FT, the IMF concluded in its recent World Economic Outlook (see Box 1.3) that cyclical factors explain a significant share of the current account reversals in vulnerable euro-area members and their “current account deficits could widen again significantly when cyclical conditions, including unemployment, improve, unless competitiveness improves further.” The three Baltic countries may provide examples: these countries went through a much faster economic contraction (accompanied by a rapid move from double-digit current account deficits to current account surpluses), but as they started to recover, their current account surpluses turned to (small) deficits. A re-emergence of current account deficits in southern euro-area members, which would be reflected in their worsened trade balances, should be filled with foreign supply of goods and services. Germany is of course a major candidate to fill such a gap, due to geographical closeness and trade links. An increased demand for German exports may well lead to an increased overall German trade surplus, unless German domestic demand increases significantly.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article
 

Blog Post

European governance

Opaque and ill-defined: the problems with Europe’s IPCEI subsidy framework

Lack of strict governance and transparency creates serious risk that fair competition within the single market will be undermined. Fundamental overhaul of the framework is needed.

By: Niclas Poitiers and Pauline Weil Topic: European governance, Macroeconomic policy Date: January 26, 2022
Read article More by this author
 

Podcast

Podcast

Turkey’s economic struggles

Will inflation continue to surge?

By: The Sound of Economics Topic: Global economy and trade, Macroeconomic policy Date: January 26, 2022
Read article More by this author
 

Opinion

European governance

The euro comes of age

A well-functioning euro reflects a degree of unity that allows the EU to credibly claim a position at the global table and therefore help shape the policies that will deal with global problems. That is a decisive success.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: January 13, 2022
Read article More on this topic More by this author
 

Opinion

A role for the Recovery and Resilience Facility in a new fiscal framework

Discussions on reforming European Union fiscal rules must consider a more permanent but targeted role for the Recovery and Resilience fund to meet climate ambitions.

By: Maria Demertzis Topic: Macroeconomic policy Date: January 10, 2022
Read article More by this author
 

Podcast

Podcast

The European economy in 2022

What are the economic priorities for the new year?

By: The Sound of Economics Topic: European governance, Macroeconomic policy Date: January 5, 2022
Read article More by this author
 

Opinion

European governance

The Euro at 20

The euro’s advocates hoped that the single currency would deliver economic and financial integration, policy convergence, political amalgamation, and global influence. While these predictions were often wide of the mark, the euro has arguably proven to be a wise investment.

By: Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: January 3, 2022
Read article
 

Blog Post

European governanceInclusive growth

12 Charts for 21

A selection of charts from Bruegel’s weekly newsletter, analysis of the year and what it meant for the economy in Europe and the world.

By: Hèctor Badenes, Henry Naylor, Giuseppe Porcaro and Yuyun Zhan Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: December 21, 2021
Read article
 

Blog Post

European governance

Policy coordination failures in the euro area: not just an outcome, but by design

Discussions on the fiscal framework should aim to correct its procyclical nature with a view to promoting more cooperative outcomes.

By: Maria Demertzis and Nicola Viegi Topic: European governance, Macroeconomic policy Date: December 20, 2021
Read article
 

External Publication

European governance

EU borrowing—time to think of the generation after next

Financing post-pandemic recovery via EU borrowing has proved remarkably straightforward. So why keep it temporary?

By: Grégory Claeys, Rebecca Christie and Pauline Weil Topic: European governance, Macroeconomic policy Date: December 9, 2021
Read article More on this topic More by this author
 

Opinion

Inflation ideology: camp permanent or camp temporary?

Policy focus should be on tackling uncertainties by being able to tackle as many scenarios as possible.

By: Maria Demertzis Topic: Macroeconomic policy Date: December 9, 2021
Read about event More on this topic
 

Past Event

Past Event

Fiscal policy and rules after the pandemic

What are the possibilities for shaping the new fiscal policy?

Speakers: Zsolt Darvas, Maria Demertzis, Michel Heijdra and Katja Lautar Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: November 24, 2021
Read article
 

Blog Post

European governance

Including home-ownership costs in the inflation indicator is not just a technical issue

The European Central Bank is right to propose inclusion of owner-occupied housing services in the inflation indicator. But the ECB’s preferred method would involve an asset price in the consumer inflation indicator.

By: Zsolt Darvas and Catarina Martins Topic: European governance, Macroeconomic policy Date: November 18, 2021
Load more posts