Results

The results of the econometric analysis are shown in Tables 4.7-9. In each table, the first three columns show the estimated relation for ex-port flows of GIPS, deficit, and surplus countries, respectively; whereas columns 4-6 show the estimated relation for import flows. Results for

11 The presence of missing data forced us to exclude Luxembourg, Cyprus and Malta.

4.IN SEARCH OF THE DETERMINANTS

149

the whole sample are reported in Table 4.7, whereas Tables 4.8 and 4.9 report the outcomes for the two sub-periods.

The estimates for the whole period (Table 4.7) provide interesting insights and appear to be consistent with the estimates on the two sub-periods. As shown in Chapter 1, imbalances started to increase in 2003, while the first years of the euro were characterised by small divergenc-es. This pattern is confirmed by the estimation results since real and fi-nancial variables exert different impacts in the two sub-periods. Relative growth is relevant in explaining the export performance and its impact is stronger in the first sub-period (columns 1-3 in Table 4.8). Relative inflation seems to affect both import and export flows, but while in the first period it acted mainly by stimulating import flows, since 2003 it al-so affected the export performance.¹² Given that the GIPS and the deficit countries experienced on average a higher inflation dynamics compared to surplus ones, we can conclude that the price dynamics acted so as to reduce the exports of GIPS and the other deficit countries while foster-ing the exports of surplus countries.

Let’s now consider financial variables. Exporter’s NIIP has a positive impact on exports of both GIPS and surplus countries. Nevertheless, the NIIP actually deteriorated for the former, and the final effect was an in-crease in the exports of surplus countries and a widening of imbalances.

On the import side, we find evidence of a negative impact of a rise in the NIIP on deficit countries. Since this variable actually worsened in deficit countries, the final effect is an increase in imports and, by consequence, a widening of imbalances.

The dynamics over the whole period 1999-2007 hide different evolu-tions in the two sub-periods. In particular, we see that, while the benefi-cial effect of exporter’s NIIP on the export of surplus countries is con-centrated in the first period (column 3 in Table 4.8), the effect on GIPS is not significant.¹³ We also find that in the first period the deterioration of

12 Relative inflation is defined as the difference between importer and exporter infla-tion; hence, in most cases a positive sign is expected because an increase in the variable implies cheaper imports and more expensive exports.

13 This outcome can be ascribed to the concentration of the positive effect around the period 2002-2003, so that each subsample captures only a part of the whole effect.

IN SEARCH OF A NEW EQUILIBRIUM.ECONOMIC IMBALANCES IN THE EUROZONE

the net position for the whole group of deficit countries improved their export performance. This suggests that increasing financial imbalances, at least in the initial years of the euro, stimulated intra-area trade flows for all countries, with a higher intensity for the group of deficit coun-tries. This prevented the development of excessive trade imbalances.

The convergence of interest rates stimulated both import and export flows of deficit countries on average. This result is robust throughout the whole period, but since 2003 it acted by stimulating import flows of all countries and, more intensively, for the group of GIPS (see column 4 in Table 4.9). Importer’s gross investment over the whole period stimu-lated the imports of surplus countries but this result comes mainly from the 1999-2002 period while in the following period it raised the demand for imports of deficit countries.

Relative RULCs are significant in explaining intra-euro area trade flows. According to the estimated coefficients, they acted mainly by re-ducing the export capacity of deficit countries and by increasing import flows of GIPS and surplus countries. For the latter, the impact is the highest, since relative RULC in surplus countries actually decreased, the final effect over the period was a reduction of imports from most of their partners. As we can see in Tables 4.8 and 4.9, real competitive differ-ences started to be relevant since 2003 and acted so as to foster imbal-ances by reducing the exports of GIPS and of the whole group of deficit countries, increasing the imports of GIPS, and reducing the imports of surplus countries.

The last piece of evidence regards the share of importers’ investment in non-tradable sectors as an indicator of investment bubbles or in gen-eral of an excessive development of non-productive investment. The re-sults are straightforward. The investment in non-tradables significantly increased the import flows of GIPS. This comes mainly from the period 2003-2007, when the excessive development in construction and real estate activities increased the import of the whole group of deficit coun-tries. The positive coefficient for the export of deficit countries, associ-ated with the insignificant one for the export of GIPS indicates that in-vestment in non-tradables stimulated the export of Italy and France (compare columns 1 and 2 in Table 4.9). By contrast, in the first part of the sample we find an opposite process, suggesting that import flows

4.IN SEARCH OF THE DETERMINANTS

151

Summing up, our results suggest that financial integration, competitive differences and over-development of the non-tradable sector represent the main forces behind the evolution of intra-euro area trade imbalances between 1999 and 2007. Nevertheless, in the first sub-period, we find that: (i) up to 2002 financial integration and domestic investment led to a relatively balanced process where all countries increased exports, in spite of diverging financial positions; and (ii) the convergence of interest rates fostered both import and export of deficit countries, where investment was strongly turned on imported tradable goods. Since 2003 and up to the global financial crises, financial variables played no direct role, except for the interest rate convergence, whereas trade flows were mainly driv-en by nominal and real competitive differdriv-ences as well as by the demand for non-tradable investment goods. Competitive differences also played a role by reducing the export performance of deficit countries and the im-ports of surplus ones, whereas the development of non-tradables in-creased the import of deficit countries especially in the group of GIPS.

This is an indirect consequence of financial integration, as the massive capital inflows into the deficit countries fuelled the investment bubbles and the development of the non-tradable sector.