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 article More by this author

Blog Post

The DSGE Model Quarrel (Again)

Dynamic Stochastic General Equilibrium models have come under fire since the financial crisis. A recent paper by Christiano, Eichenbaum and Trabandt – who provide a defense for DSGE – has generated yet another wave of reactions in the economic blogosphere. We review the most recent contributions on this topic.

By: Silvia Merler Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 11, 2017
Read about event More on this topic

Upcoming Event

Dec
13
11:00

Better policies for people on the move

This event will feature the launch of a new Bruegel study on the impact and integration of migrants in the European Union.

Speakers: Manu Bhardwaj, Elizabeth Collett, Zsolt Darvas, Eva Degler, Maria Demertzis, Arjen Leerkes, Rainer Münz, Matthias Oel, Alessandra Venturini and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

Sovereign Concentration Charges are the Key to Completing Europe’s Banking Union

The past crisis revealed that most euro-area banks have disproportionate sovereign exposure in their home country. Charging banks for sovereign concentration is one solution to this issue, and would help advance the discussion on banking union.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: December 7, 2017
Read about event More on this topic

Past Event

Past Event

Health care and macro-economics in Europe

What are the strengths and challenges of health care systems in each EU country? What are the common policy priorities and opportunities for EU value added?What role do healthcare systems play in public finances and macroeconomic developments? What are the economic values of investing in healthcare?

Speakers: Zsolt Darvas, Caroline Costongs, Per Eckefeldt, Sylvain Giraud, Petra Laux and Xavier Prats Monné Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 7, 2017
Read article More on this topic

Blog Post

Promoting intra-regional trade in the south of the Mediterranean

Regional integration is still a sure way for economies in development to achieve economic growth on the global market. The south of the Mediterranean has still a low level of intra-regional trade integration, dominated by some overlapping trade agreements and political instability. The EU has the opportunity to play a decisive role, promoting and coordinating the process.

By: Filippo Biondi and Maria Demertzis Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More on this topic More by this author

Blog Post

The eurozone medley: a collection of recent papers on the future of euro-area governance

Our scholars Grégory Claeys, André Sapir, Dirk Schoenmaker, Nicolas Veron and Guntram B. Wolff, explore the next steps needed to create a more functional and coherent economic governance framework.

By: Bruegel Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More on this topic More by this author

Blog Post

How the EU has become an immigration area

Natural change of EU28 population (the balance of live births and deaths) has fallen from high positive values in the 1960s to essentially zero recently, while the previous close-to-zero net immigration has turned positive and, since the early 1990s, become a more important source of population growth than natural increase

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More by this author

Blog Post

The European Union with the Community of Latin America and the Caribbean: where do we stand?

Latin American and Caribbean countries have deep historical, political, cultural, and economic ties with Europe, and cooperation between the two regions has been intensifying recently. Here we report some of the main trends in trade, foreign direct investment, and agreements between the European Union and The Community of Latin American and Caribbean States, the European Union’s official counterpart in the bi-regional strategic partnership that commenced in 1999.

By: Francesco Chiacchio Topic: European Macroeconomics & Governance, Global Economics & Governance Date: December 5, 2017
Read article More by this author

Opinion

EU should pay member states to get rid of coal

The European Union should act to ensure the continued transformation of its energy system, and encourage member states to overcome their dependence on coal for supplying electricity. Helping coal-mining regions with the transition should require €150 million per year – a mere 0.1% of the total EU budget – and the EU would not even need to establish a new fund to support it.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: December 5, 2017
Read article More on this topic More by this author

Opinion

The European Commission should drop its ill-designed idea of a finance minister

Beyond the opposing ideas of Jean-Claude Juncker and Wolfgang Schäuble for future euro-area governance, Guntram Wolff explores how alternatives such as a reformed Eurogroup might yield more effective fiscal policy-making.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 4, 2017
Read about event More on this topic

Past Event

Past Event

Flexicurity and labour market reforms in Europe

This event will discuss the potential of the flexicurity model as employment strategy and the way it could be implemented in European countries to be successful.

Speakers: Grégory Claeys, Philip Collins, Werner Eichhorst, Antoine Foucher, Maria Jepsen and Marco Leonardi Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 4, 2017
Read article Download PDF More on this topic More by this author

Policy Brief

Beyond the Juncker and Schäuble visions of euro-area governance

Two diametrically opposed visions of the euro-area architecture have been put forward. Departing from both Juncker’s and Schäuble’s proposals, the author identifies new ideas to develop the euro-area governance

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 1, 2017
Load more posts