The Wilder View

It’s the Exchange Rate, Stupid

Eurostat released trade figures today, where the trade balance (exports less imports) surged €3.7 bn in the month of June (link to the .pdf release). The current figures imply a 2012 annualized trade balance of €66.9 bn, which is a meaningful boost to the -€7.4 bn deficit in 2011.

Eurostat breaks down the regional figures further into intra-Euro area (intra-EA) trade and extra-Euro area (extra-EA) trade.

Out of the EA 16, June intra-EA figures are available for just a few countries. Of those countries, the intra-EA trade balance improved in Portugal only, increasing by 0.26 ppt as a share of GDP on the month. From June 2011 to June 2012, where available, otherwise June 2011 to May 2012 (see Table above), the intra-EA rebalancing – i.e., roughly raising the balance of the net-importers and reducing the surplus of the net-exporters – has occurred to a certain degree. Net trade as a share of country GDP fell in Germany, and rose in Italy, Spain, Greece, and Portugal. France and Ireland worsened their positions, while the Netherlands increased its large trade surplus of 25.1% of GDP over the year.

Except in Portugal and Greece, the intra-EA ‘rebalancing’ is either not necessarily required due to the relatively low imbalances, Spain or Germany, or moving in the wrong direction, France or the Netherlands.

June extra-EA figures are available for all countries. With the help of the real depreciation of the trade-weighted euro over the month, the extra-EA trade balance improved in June across all EA 16 countries except for Ireland, where it fell by 0.2 ppt of GDP. Over the year through June, all countries except the Netherlands saw an improvement in the trade balance as a share of GDP (see Table above).

Given the strong positive momentum in extra-EA net trade and the sluggish shift in intra-EA net trade, I conclude that it’s the depreciation of the real exchange – the 12.7% nominal depreciation of the euro against the dollar, for example, and/or falling relative price levels with extra-EA economies – that’s the primary driver of the improving trade balances in key periphery markets. With the strong exception of Portugal, where the intra-EA balance improved by 2.6 ppt of GDP over the year, the internal (infernal) devaluation of repressing wages through high unemployment has mixed results at best.

Rebecca Wilder

Note: I understand the imbalances lie in the financial accounts as well but this post is dedicated to trade only.

A point on the data: all numbers are seasonally adjusted.

4 Responses to “It’s the Exchange Rate, Stupid”

EugenRAugust 17th, 2012 at 8:41 pm

Whats wrong about weaker Euro? It by itself has a trend to the right direction. It was to strong anyway.

And if i see correctly, inter Euro trend is also to the right direction. The problem seems to be the velocity of this change. Namely in Greece, yes Greece again.

princess1960August 17th, 2012 at 9:18 pm

thank you

Patrick_VBAugust 20th, 2012 at 10:59 am

The problem is that all countries cannot simultaneously hope to expand GDP by increasing exports… Europe is counting on the Rest of the World growth to raise exports, while the rest of the world economy is very export-dependent vàv Europe… Fundamentally, sustainable growth can only be obtained through fostering domestic demand while maintaining the current account more or less in balance over the long run.

HepionSeptember 17th, 2012 at 8:13 am

Hi Rebecca

I call your attention to Current Account balances because they reflect what countries really earn from abroad or lose wealth to foreigners.

Trade balances are just small subsection of that and give misleading picture.

And take a look at this:

For Eurozone as a whole Current Account has always been rougly in balance. That means trade is incabable of providing either boost or brake to the overall EA economy. As a sidenote, these figures should never be quoted as an absolute figure, as billion for Estonia is much more than billion for Germany. Only expressing them as % of GDP gives some meaning to these figures.

This also mean euro is not undervalued, or overvalued, it has been perfecly valued to balance the trade. And the reason is systemic, euro-area accunts roughly balance out simply because exports pay for imports in the currency markets. Movements in capital account that could pay for exports or imports and therefore finance unbalanced current account are missing because of the structure of the eurosystem.

So any country having positive Current Account with outside EZ is offset by other coutries having negative Current Account with outside, any country improving it's CA is offset by other countries is offset, etc. It all nets to zero.

Trade is incabable of providing a boost to the euro area as a whole.

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