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: European Macroeconomics & Governance

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.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read about event More on this topic

Past Event

Past Event

Perspectives on Universal Basic Income

At this event, we discussed the possible benefits but also the possible disadvantages of Universal Basic Income.

Speakers: Grégory Claeys, Olli Kangas, Professor Philippe Van Parijs and Prof. Dr. Hilmar Schneider Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 12, 2017
Read article More on this topic More by this author

Blog Post

The forward guidance paradox

What’s at stake: the term “forward guidance” is used in economic jargon to describe central bank communications about the likely future path of policy rates. Standard monetary models imply that far future forward guidance has huge effects on current outcomes, and recent literature has been trying to reconcile this with reality.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: July 10, 2017
Read about event

Past Event

Past Event

Is there a way out of non-performing loans in Europe?

At this event we looked at the issue of non-performing loans in Europe. The event also saw the launch of the latest issue of "European Economy – Banks, Regulation and the Real Sector."

Speakers: Emilios Avgouleas, Giorgio Barba Navaretti, Giacomo Calzolari, Maria Demertzis, Martin Hellwig, Helen Louri and Laura von Daniels Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 6, 2017
Read article Download PDF More on this topic

External Publication

Review of EU-third country cooperation on policies falling within the ITRE domain in relation to Brexit

What is the possible future relationship between the EU and the UK in light of Brexit? The report provides a critical assessment of the implications of existing models of cooperation between third countries and the European Union on energy, electronic communications, research policy and small business policy.

By: J. Scott Marcus, Georgios Petropoulos, André Sapir, Simone Tagliapietra, Alessio Terzi, Reinhilde Veugelers and Georg Zachmann Topic: European Macroeconomics & Governance Date: July 5, 2017
Read about event

Upcoming Event

Sep
7-8
09:00

Bruegel Annual Meetings 2017

The Annual Meetings are Bruegel’s flagship event. They offer a mixture of large public debates and small private sessions about key issues in European and global economics. In a series of high-level discussions, Bruegel’s scholars, members and stakeholders will address the economic policy challenges facing Europe.

Speakers: José Antonio Álvarez Álvarez, Agnès Bénassy-Quéré, Pervenche Béres, Jean Luc Demarty, Anna Ekström, Lowri Evans, Sandro Gozi, Peter Grünenfelder, Patrick Graichen, Reiner Hoffman, Levin Holle, Steffen Kampeter, Peter Kažimír, Emmanuel Lagarrigue, Steven Maijoor, Nathalie Moll, James Murray, Carlos Sallé Alonso, André Sapir, Dirk Schoenmaker, Mateusz Szczurek, Marianne Thyssen, Liviu Voinea, Johan Van Overtveldt, James Waterworth, Ida Wolden Bache and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Square - Brussels Meeting Centre
Read article More on this topic More by this author

Blog Post

Eurozone or EU budget? Confronting a complex political question

This week’s European Commission reflection paper is the latest document to ponder a distinction between EU and euro-area budgets. But do we need to split the two, and what would each budget be used for? In this post, I present an analytical framework for assessing this ultimately political question

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 29, 2017
Read about event

Upcoming Event

Sep
28
12:30

Unfinished business: The unexplored causes of the financial crisis and the lessons yet to be learned

At this event Tamim Bayoumi will present his upcoming book on the financial crisis, showing how how the Euro crisis and U.S. housing crash were, in fact, parasitically intertwined.

Speakers: Tamim Bayoumi, Maria Demertzis and Aerdt Houben Topic: European Macroeconomics & Governance, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

Raising the inflation target: a question of robustness

In an unexpected move, the Federal Reserve Chair Janet Yellen has recently brought up the issue of raising the inflation target. This blog argues that an increase in inflation targets may prove to be beneficial in achieving price stability in the long run. This would increase the credibility of central banks in achieving inflation goals and stave off the distortionary effects of deflation.

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: June 22, 2017
Read article More on this topic

Blog Post

Can EU actors keep using common law after Brexit?

English common law is the choice of law for financial contracts, even for parties in EU members with civil law systems. This creates a lucrative legal sector in the UK, but Brexit could make UK court decisions difficult to enforce in the EU. Parties will be able to continue using English common law after Brexit, but how will these contracts be enforced? Some continental courts are preparing to make judicial decisions on common law cases in the English language.

By: Uuriintuya Batsaikhan and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: June 22, 2017
Read article More on this topic More by this author

Blog Post

The size and location of Europe’s defence industry

There is growing debate about a common European military policy and defence spending. Such moves would have major economic implications. We look at the supply side and summarise some key facts about the European defence sector: its size, structure, and ability to meet a possibly increased demand from EU member states.

By: Alexander Roth Topic: European Macroeconomics & Governance Date: June 22, 2017
Read article More by this author

Parliamentary Testimony

House of Commons

Exiting the European Union Committee

On 19 April 2017 Zsolt Darvas appeared as a witness at the Exiting the European Union Committee, the House of Commons, United Kingdom.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, House of Commons, Testimonies Date: June 20, 2017
Read article More on this topic More by this author

Blog Post

Brexit and the future of the Irish border

The future of the Irish land border has been thrown into uncertainty by Brexit. The UK's confirmation that it will leave the EU's single market and customs union implies that customs checks will be needed. However, there is little desire for hard controls from any of the parties involved. This is especially true for Theresa May's potential partner, the DUP. Creative solutions are needed to reach a solution.

By: Filippo Biondi Topic: European Macroeconomics & Governance Date: June 19, 2017
Load more posts