The German surplus and the Eurosceptics

Francesco Daveri

Eurosceptic parties have been popular in the recent European elections, many complaining that the euro has only served Germany's interests. This column points out that although data on aggregate trade flows show that Germany's trade surplus with the rest of the Eurozone is not excessive, the success of a Eurosceptic party is larger in countries where the bilateral trade deficit with Germany has increased in recent years. A gradual rebalancing of Germany's external accounts of Germany would bring with it not only a greater economic stability in the Eurozone but also greater political stability.

In the European elections of 25 May, the Eurosceptic parties achieved considerable electoral success.

In France, the National Front of Marine Le Pen got a quarter of the vote, with the slogan “Our People ask only one policy: The policy of the French for the French”.

In the UK, the Independence Party (UKIP) led by Nigel Farage has obtained 27% of the vote by placing at the centre of its election program the UK’s exit from the European Union.

After the ‘bastaeuro’ tour, the Northern League of Matteo Salvini has exceeded 6% of the votes in Italy.

Despite Germany’s stable political framework, the German anti-euro party AFW (Alternative für Deutschland) reached 7% and will be represented for the first time in Strasbourg.

Overall, the Eurosceptics will be represented by 40 delegates in the new Parliament. Their electoral success marks a clear break with the past.

German surplus with the Eurozone not excessive

Outside Germany, the glue of Eurosceptic parties in the Eurozone countries has been pounding the reference to ‘German’ Europe under the tenet that the euro has served only the interests of Germany. Many have pointed the finger at the German trade surplus against the other countries of the Eurozone. An excessive trade surplus derives from ‘excessive’ exports and ‘too little’ imports, both signs of a selfish attitude of Germany. The Germans, according to this view, are inclined to steal market and jobs from its European partners with exports that are not matched by increased imports.

The data on overall trade flows between Germany and its trade partners, however, are inconsistent with this view – a view which stands on the false assumption that a euro exported from a country is equal to a euro less produced in the country of destination. It is true that in 2013 Germany has run a positive trade surplus in goods and services of some 7% of GDP with respect to the world. A surplus so high in the external accounts is unique in Europe, being observable only for commodity exporters such as Russia and the Arab countries, or for emerging countries such as China, which has made export manufacturing the locomotive of its development.

Yet, it should be pointed out that the bulk (five out of seven percentage points) of the German trade surplus is with the rest of the world – not with Eurozone countries. This leaves a small 2% of GDP for its surplus with the Eurozone countries. Barack Obama may thus complain to Mrs Merkel about the size of its trade surplus, not her fellow partners in the Eurozone (and in fact he did so in November 2013).

One should also note that the two percentage points of today's trade surplus against the Eurozone had risen to almost five percentage points in 2007 coming from less than three in the year the euro was introduced. It, thus, appears that today’s surplus is much lower than it used to be six years ago and is matching its pre-Eurozone levels. Seen through the eyes of today, therefore, the introduction of the euro was neutral on the external accounts in Germany compared to other countries of the monetary union. Irrespectively of whether this is the result of purposeful effort or just the automatic effect of the crisis that has caused a dramatic divergence in growth rates between the north-central and the southern areas of the Eurozone, the data indicate, in the six years between 2007 and 2013, Germany has not given a small contribution to the correction of imbalances within the Eurozone.

The German surplus and Ms Le Pen

But where does the support for Ms. Le Pen come from? To answer we must look beyond the aggregate flows of trade and focus on bilateral trade. In a recent paper (Unicredit Weekly Focus, No. 99, March 20, 2014), Andreas Rees performs just this kind of disaggregation for German trade, and shows the evolution of the German trade balance with respect to each of the main Eurozone partners, while decomposing the change in the trade balance between 2007 and 2013 into the growth of exports and the growth of imports. The results of the breakdown (shown in the table) indicate the presence of much differentiated situations that help understand the success of the Eurosceptics.

The first line of the table gives the most telling story. It shows that the trade surplus of Germany against France has actually increased over time, in stark contrast with the evidence brought to bear from aggregate trade flows. This further increase has been the result of a marked increase in German exports to France (+9,5%) which more than offset an only modest increase in German imports from France (+2% since 2007).

Another, though less extreme, case in point is Austria whose trade deficit with Germany has stayed stubbornly high (close to €20 billion). Not by chance, the Austrian Eurosceptic Freedom party (FPO) has collected nearly 13% of the vote, totalling an increase of six percentage points, compared to the 2009 elections. In the other Eurozone countries, the German surplus has gone down (sharply in Italy, Spain, the Netherlands, and Belgium), often as a result of the combination of falling exports and rising imports). In these countries, the success of the anti-euro parties has been more subdued.

Based on the evidence of today, there is no need to adhere to unlikely to mercantilism theories of the past to conclude that a gradual rebalancing of the external accounts of Germany (preferably with export flows growing less than its flow of imports), would bring with it not only a greater economic stability in the Eurozone but also greater political stability.

Table 1. The German trade surplus with respect to EZ countries, 2007-13

Source: Unicredit Weekly Focus, No. 99, March 20, 2014.