Trade balances within European countries

Trade balances within the euro area, the EU and with extra-EU countries are shown in Table 4.1.⁵ Intra-euro area trade has contributed mostly to the increase in surplus countries, especially for the Netherlands and Germany. Between 1999 and 2007 these two countries extracted most of their surpluses from the euro area, and the Dutch case is particularly evident as its balance with extra EU countries is strongly negative.

For deficit countries, the deterioration of the balance is mainly due to extra EU27 trade. Between 2003 and 2007, Spain lost 2.2% of GDP against this group; similarly, Italy lost 1.3%, which more than offset the improvement within the EU, especially vis-à-vis non EMU countries. The Greek negative balance outside the EU doubled, passing from -3.9% in 1999 to -7.8% in 2007, while the imbalance within the EU and the EMU

5 Due to the different data source for geographically disaggregated trade flows the sum of intra- and extra EU27 trade does not exactly match the total trade balance shown in Chapter 1.

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kept basically stable although strongly negative. The Slovenian case is interesting, as the relative stability of its overall deficit is the result of a loss outside the EU and a strong gain against the European non-EMU countries.

Exceptions to this pattern are represented by Portugal, which shows no geographical change in the composition of deficit, and France, where two thirds of the total loss between 1999 and 2007 are generated within the EU and mainly within the euro area.

Among the remaining countries it is interesting to note that the re-covery of Austrian net exports is entirely due to the extra EMU trade flows, especially with European countries. In fact, Austria together with Germany has been one of the countries most engaged in outsourcing ac-tivities with CEECs (see Marin 2006).

As shown in Chapter 1, there has been a general reduction in trade imbalances since the global financial crisis, due to both the collapse of domestic demand and investment and to a partial export recovery. In most of the deficit countries, the reduction is mainly due to the im-provement of trade balances within the euro area, while Italy, similar to Germany, has gained from extra EU trade.

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Box 4.2. Price Effects, Volumes Effects and Oil Price Dynamics:

Do They Foster Imbalances?

The evolution of trade prices is an important component in explaining changes in trade and current account imbalances. Nevertheless, little at-tention has been paid by the European authorities to the development of the terms of trade in European countries, and no consideration of trade prices is included in the MIP. The dynamics of trade prices is strictly re-lated to the evolution of exchange rates between the euro and the other main currencies, especially the US dollar, and to the dynamic of the oil price as European countries are, on average, still strongly dependent on the import of oil from outside the EU.

This box aims to assess the importance of price dynamics on trade im-balances among euro area members. We do so by deconstructing chang-es in trade balancchang-es into price and volume effects and by asschang-essing the contribution of trade flows of oil and oil-related products (in such ef-fects). The methodological details of the deconstruction are described in the following section, whereas the discussion of the results is in Section B4.2.

B4.1 Decomposition of trade balance changes

We decompose the overall variation of net export of goods and services into the effect of trade prices (unit values) and volumes. As we are in-terested in GDP ratios, we further include the effect of changes in both real GDP and GDP deflator. As a starting point, we can express the trade balance at current prices as:

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where p^x and p^m are export and import unit value indexes, p is the GDP deflator and the superscript k indicates constant prices. By dividing val-ues into price and volume components and total differentiating⁶ the two sides of equation (1) we obtain the contribution of each factor on export and import flows as follow: where the first two blocks on the right hand side of equations (2) and (3) represent the contribution of trade prices and volumes. The third and fourth blocks represent the impact of variations in the overall price level and real GDP(,) effects that are not null only when the trade bal-ance is significantly different from zero.

B4.2 Main evidence

For the euro area as a whole, the dynamics of import and export prices, as well GDP deflator, is shown in Figure B4.1. GDP deflator evolved smoothly from 2000 to 2012 while the dynamics of trade prices shows a reduction of both import deflators during the period 2000-2003.⁷ As import prices are more dependent on and strictly correlated with the oil price (Figure B4.2), we observe an improvement in the terms of trade

6 The total differential is defined as the sum of changes in each component, weighted by the partial derivative of the trade balance with respect to the given component. This is similar to the calculation of the contributions to GDP growth, the only difference being in the simple additive form of the GDP equation whereas partial derivatives are simply given by the initial value of the component.

7 Data for 1999 are not available.

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

up to 2003 as import prices fell more. In the following period, and up to the global financial crisis, both indexes started to increase, but while the export price matches closely the pattern of GDP deflator, the import price experienced a faster dynamic because of the strong rise in the oil price. The greater reaction of import prices to the oil price continued al-so during and after the global financial crisis.

Focusing on the period 2000-2007, in Figures B4.3 and B4.4 we plot trade balance changes against price effects obtained from equations (2) and (3) for the two sub-periods 2000-2002 and 2003-2007. In the Fig-ures the blue dots indicate variables calculated on total trade and the red triangles refer to changes excluding oil and oil related products (category SITC 3). As we already know from Chapter 1, the evolution of trade balances was positive in most of the countries, with the exception of Greece and Italy. Due to the greater fall of the import deflator, the price effect was positive almost everywhere over the same period and this is true also excluding oil products.

The picture for the period 2003-2007 is reverted and more jeopardised.

The north-south dichotomy in terms of total changes is broadly replicat-ed also excluding oil products, but a substantial effect of oil products is clearly present in Finland, Spain and Ireland. Interestingly enough, the Italian trade balance turns positive when excluding oil products and the oil price plays a major role as the increase is almost entirely due to a volume effect.

In conclusion, the dynamics of trade prices exerted a roughly balanced effect on the members of the euro area. Although, the dependence on ex-tra EU imports for oil products had a negative effect on the ex-trade bal-ance, between 2003 and 2007, when imbalances experienced their greater increase, country differences were not exacerbated by the dy-namics of trade prices. The only exception is Italy, for which the de-pendence on oil imports account for most of the balance deterioration.

For this country, policies aiming at reducing the dependence on oil im-ports could prove effective in boosting the country’s export

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Figure B4.1. Trade Prices and GDP Deflator for the Euro Area and Main Countries

Source: Eurostat.

Figure B4.2. Change in Trade Balance Excluding Oil and Oil Related Products (2010-2012)

0 20 40 60 80 100 120 140

gen-2000 set-2000 mag-2001 gen-2002 set-2002 mag-2003 gen-2004 set-2004 mag-2005 gen-2006 set-2006 mag-2007 gen-2008 set-2008 mag-2009 gen-2010 set-2010 mag-2011 gen-2012 set-2012 mag-2013

Dollars per Barrel Euro per Barrel

Source: US Energy Information Administration and Eurostat.

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

Figure B4.3. Change in Trade Balance and Price Effect (2000-2002)

CY

total trade total trade excluding oil products

Source: Own elaboration on Eurostat.

Figure B4.4. Change in Trade Balance and Price Effect (2003-2007)

FI

total trade total trade excluding oil products

Source: Own elaboration on Eurostat.

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