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The Euro’s Effecton Trade Imbalances

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Author Info

  • Helge Berger
  • Volker Nitsch

Abstract

When does trade become a one-way relationship? We study bilateral trade balances for a sample of 18 European countries over the period from 1948 through 2008. We find that, with the introduction of the euro, trade imbalances among euro area members widened considerably, even after allowing for permanent asymmetries in trade competitiveness within pairs of countries or in the overall trade competitiveness of individual countries. This is consistent with indications that pair-wise trade tends to be more balanced when nominal exchange rates are flexible. Intra-euro area imbalances also seem to have become more persistent with the introduction of the euro, some of which is linked to labor market inflexibility. Reviewing the direction of imbalances, we find that bilateral trade surpluses are decreasing in the real exchange rate, decreasing in growth differentials, and increasing in the relative volatility of national business cycles. Finally, countries with relatively higher fiscal deficits and less flexible labor and product markets exhibit systematically lower trade surpluses than others.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/226.

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Length: 30
Date of creation: 01 Oct 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/226

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Keywords: Euro; Bilateral trade; Exchange rate regimes; Labor market policy; exchange rate; trade imbalances; exchange rates; real exchange rate; nominal exchange rate; exchange rate regime; exchange rate volatility; fixed exchange rate; exchange rate variability; nominal exchange rates; trade deficit; trade relationships; trade deficits; current accounts; exchange rate flexibility; partner country; fixed exchange rates; exchange rate change; trade effects; member country; fixed nominal exchange rates; flexible exchange rates; trade relations; trade partners; adjustment to shocks; fixed exchange rate regimes; real effective exchange rate; balance trade; area trade; import demand; bilateral trade relations; partner countries; trade relationship; economic integration; trade flows; effective exchange rate; exchange rate mechanism; bilateral exchange rate; trade effect; trade intensity; income convergence; output growth; protection levels; exchange rate index; fixed nominal exchange rate; distortionary policies; exchange rate dummy; log real exchange rate; real exchange rate appreciation; currency boards; increasing growth; trade patterns; external position; increasing trade; monetary union; trade data; impact of trade; exchange rate arrangements; fixed exchange rate regime; international integration; open trade; real exchange rates; adjustable exchange rates; exchange rate appreciation; income differences; exchange rate changes; average trade; international trade; balance of payments; exchange rate indices; flexible exchange rate; monetary integration; external trade; importing country; terms of trade; protectionist measures; flexible exchange rate regime; patterns of trade; exchange rate stability;

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References

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  1. Alan Ahearne & Jürgen von Hagen, 2005. "Global current account imbalances: how to manage the risk for Europe," Policy Briefs 231, Bruegel.
  2. Robert Dekle & Jonathan Eaton & Samuel Kortum, 2007. "Unbalanced Trade," NBER Working Papers 13035, National Bureau of Economic Research, Inc.
  3. Jörg Decressin & Emil Stavrev, 2009. "Current Accounts in a Currency Union," IMF Working Papers 09/127, International Monetary Fund.
  4. Alberto Alesina & Silvia Ardagna & Giuseppe Nicoletti & Fabio Schiantarelli, 2003. "Regulation and Investment," NBER Working Papers 9560, National Bureau of Economic Research, Inc.
  5. Shang-Jin Wei & Jiandong Ju, 2008. "Current Account Adjustment: Some New Theory and Evidence," 2008 Meeting Papers 851, Society for Economic Dynamics.
  6. Ca' Zorzi, Michele & Rubaszek, Michał, 2008. "On the empirical evidence of the intertemporal current account model for the euro area countries," Working Paper Series 0895, European Central Bank.
  7. Ansgar Belke & Holger Zemanek & Gunther Schnabl, 2010. "Current Account Balances and Structural Adjustment in the Euro Area," Ruhr Economic Papers 0176, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  8. Biroli, Pietro & Mourre, Gilles & Turrini, Alessandro Antonio, 2010. "Adjustment in the Euro Area and Regulation of Product and Labour Markets: An Empirical Assessment," CEPR Discussion Papers 8010, C.E.P.R. Discussion Papers.
  9. Olivier Blanchard, 2007. "Current Account Deficits in Rich Countries," IMF Staff Papers, Palgrave Macmillan, vol. 54(2), pages 191-219, June.
  10. Menzie D. Chinn & Shang-Jin Wei, 2009. "A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment?," Working Papers 122009, Hong Kong Institute for Monetary Research.
  11. Amelia Santos-Paulino & A. P. Thirlwall, 2004. "The impact of trade liberalisation on exports, imports and the balance of payments of developing countries," Economic Journal, Royal Economic Society, vol. 114(493), pages F50-F72, 02.
  12. Giuseppe Nicoletti & Steve Golub & Dana Hajkova & Daniel Mirza & Kwang-Yeol Yoo, 2003. "Policies and International Integration: Influences on Trade and Foreign Direct Investment," OECD Economics Department Working Papers 359, OECD Publishing.
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Citations

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Cited by:
  1. Marco Buti, 2011. "Balancing Imbalances: Improving Economic Governance in the EU after the Crisis," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 12(2), pages 03-11, 07.
  2. Matthieu Bussiere & Alexander Chudik & Arnaud Mehl, 2011. "How have global shocks impacted the real effective exchange rates of individual Euro area countries since the Euro's creation?," Globalization and Monetary Policy Institute Working Paper 102, Federal Reserve Bank of Dallas.
  3. Belke, Ansgar & Dreger, Christian, 2011. "Current account imbalances in the euro area: Catching up or competitiveness?," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48711, Verein für Socialpolitik / German Economic Association.
  4. Lenka Pítrová & Olga Francová & Jan Durica & Hana Bambasová, 2013. "Analysis of Measures and Proposals Reacting on the Crisis of the European Integration Project," Současná Evropa, University of Economics, Prague, vol. 2013(2), pages 143-165.
  5. Jarkko Turunen & Richard T. Harmsen & Tamim Bayoumi, 2011. "Euro Area Export Performance and Competitiveness," IMF Working Papers 11/140, International Monetary Fund.
  6. Angelini, Elisabetta Croci & Farina, Francesco, 2012. "Current account imbalances and systemic risk within a monetary union," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 647-656.
  7. Bergljot Barkbu & Barry Eichengreen & Ashoka Mody, 2011. "International Financial Crises and the Multilateral Response: What the Historical Record Shows," NBER Working Papers 17361, National Bureau of Economic Research, Inc.
  8. Vogel, Lukas, 2012. "Structural reforms, fiscal consolidation and external rebalancing in monetary union: A model-based analysis," Economic Modelling, Elsevier, vol. 29(4), pages 1286-1298.
  9. Gossé, Jean-Baptiste & Serranito, Francisco, 2014. "Long-run determinants of current accounts in OECD countries: Lessons for intra-European imbalances," Economic Modelling, Elsevier, vol. 38(C), pages 451-462.
  10. Christodoulopoulou, Styliani, 2010. "THE Effects of Multilateral Trade Liberalization on the Extensive and the Intensive Margins of Trade," MPRA Paper 29169, University Library of Munich, Germany.
  11. Peter Wierts & Henk van Kerkhoff & Jakob de Haan, 2012. "Trade Dynamics in the Euro Area: The role of export destination and composition," DNB Working Papers 354, Netherlands Central Bank, Research Department.
  12. Proaño, Christian R. & Schoder, Christian & Semmler, Willi, 2014. "Financial stress, sovereign debt and economic activity in industrialized countries: Evidence from dynamic threshold regressions," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 17-37.
  13. Abad, José & Löffler, Axel & Schnabl, Gunther & Zemanek, Holger, 2012. "Fiscal divergence, current account and TARGET2 imbalances in the EMU," Working Papers 105, University of Leipzig, Faculty of Economics and Management Science.
  14. Rolf J. Langhammer & Felix Mihram & Nikolaus Wolf & Volker Nitsch, 2010. "Zur Diskussion gestellt: Ungleichgewichte im Außenhandel: Wie können Handelsbilanzsalden abgebaut werden?," Ifo Schnelldienst, Ifo Institute for Economic Research at the University of Munich, vol. 63(24), pages 03-13, December.
  15. Coricelli, Fabrizio & Ravasan, Farshad R & Wörgötter, Andreas, 2013. "The origins of the German current account surplus: Unbalanced productivity growth and structural change," CEPR Discussion Papers 9527, C.E.P.R. Discussion Papers.

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