Euro Area Imbalances Are A Symptom Of The Broader Global Imbalances

Includes: DIA, FXE, SPY
by: The Wilder View

Every year I travel to Germany to visit my in-laws, which is where I am now. Given the extra time on my hands, I’ve now mulled over a June 2012 NY Times opinion piece by Gunnar Beck. Beck displays an interesting medley of data in support of his view that Germany cannot afford to backstop the European Monetary Union (the single currency union referred to as the euro area, or EA). Germany itself has been the loser, not the winner, of the single currency union. His comments are loosely based on the research of the Ifo Institute’s Hans-Werner Sinn.

Based on the ideas of Beck and Sinn, I start a short series on the benefits of membership in the EA, ex-post and ex-ante. The conclusion from this initial post: Some call the EA a microcosm of the world imbalances, i.e., Germany is to China as Spain is to the US. I disagree. I’d argue that the EA imbalances are a function of, rather than a mirror of, the broader global imbalances.

Let’s start by looking at the simple net trade statistics as rents derived by membership in the EA since 1999. I further Beck’s analysis on intra-EA trade (trade among the EA countries) for the original 1999 EA 11 economies. The 11 economies to meet the convergence criteria by 1999 were: Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland.

By definition, the trade balance is the difference between total exports and total imports, both of which are affected by relative prices and membership in the EA. The chart below illustrates the change in the annual intra-EA trade balance as a share of GDP during the period 1999 to 2011. Spanning the years 1999-2011, intra-EA gains from the fixed exchange rate regime within the EA have been lopsided toward Spain, Portugal, and the Netherlands.

(Note: for consistency, I use the EA 17 economies as the ‘trading partner’ for the period in the chart below. Furthermore, notice that the axis points in both charts are equal for ease of comparison.)

(Click to enlarge)

Being a port economy, the Dutch trade ties to the EA are strong, and gains from EA trading partners have been robust, +11% of GDP spanning the years 1999-2011. Portugal and Spain have likewise benefited, however, their intra-EA net trade gains occurred exclusively since 2008. Of interest, Finland fares the worst, having seen a 5.1% (of GDP) decline in its net trade with EA partners. And Ireland, for all its praise (please see current account stats on Ireland here ), saw its intra-EA net trade decline by 5% of GDP while in the EA – admittedly, there’s been a 4.2% of GDP gain in net trade with the EA since 2008.

Who are the winners of intra-EA trade spanning the entirety of the euro Area? As demonstrated above, not many countries. The gains from trade came primarily from net exports from developed economies outside the EA (while I do not include a country breakdown, the large net importers are the developed economies – see the IMF WEO database).

(Click to enlarge)

The chart above illustrates the change in the annual total trade balance (extra- plus intra-) of the EA 11 as a share of GDP spanning the period 1999 to 2011. Here, the gains from trade are a bit less lopsided and the "usual suspects" are evident. Germany was the third best performing economy by this measure, where net trade increased an average of 2.8% of GDP over the period. The Netherlands benefited the most of the EA 11; but the improvement was based exclusively on intra-EA trade. Portugal experienced gains from net trade from the rest of the world and the EA, where the total trade balance improved by 3.2% of GDP (again, exclusively in the post 2008 period).

Of note, France performed poorly on both counts: intra- and total net trade, -3.2% and -4.9% of GDP, respectively. In contrast, Germany performed relatively well. Being the largest economies in the EA, and given that the absolute value of the total trade balances (either deficit or surplus) exceed that of their respective intra-EA balances, I hypothesize that the global imbalances exacerbated, even caused, the EA imbalances.

Thus, EA imbalances are not a microcosm of the broader global imbalances, rather a symptom of global trade policy.

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