Current-account (CA) rebalancing is a necessary step for the Southern EZ countries to overcome their debt and external balance of payments crises.1 Figure 1 documents the impressive speed and magnitude of the southern EZ’s CA rebalancing. The green solid line plots the evolution of the rolling 12-month CA balance of these four economies.2 The figure also documents the evolution of some of the subcomponents of the CA: the 12-month balance for the services trade (blue dash-dotted line), income trade (yellow dashed line), and goods trade (red dashed line).3
From the low point in 10:2008 to the most recent data in 10:2013, the combined CA balance of these four nations has increased by €232 billion at an annualized rate. The vast majority of this development was due to an improvement in the goods and services trade: at an annualized rate, the balance in the goods trade increased by €162 billion and the services trade by €28 billion.4
Figure 1. The Southern EZ’s current-account balance and its main components
Source: BIS and Datastream.
For example, Friedman (2014) argues that imbalances “have apparently only been ‘solved’ by recession. This means, instead of a single imbalance solved, we now have two imbalances simply offsetting one another – one in currencies, and on one in domestic demand”. Earlier, Sinn and Valentinyi (2013) argue that rebalancing in the EA, when measured in terms of convergence of relative unit costs and relative prices, is far from complete. Bems and Di Giovanni (2014) document that for the case of Latvia, expenditure switching from imported to domestic varieties is an important channel of external adjustment during times of crisis. Their microeconomic study highlights that short-term income shocks can have strong effects on international imbalances, thus emphasizing the concern that rebalancing will reverse once the current crisis abates. This finding also gives a microeconomic underpinning to earlier work by Milesi-Ferreti and Lane (2012), who document that after the 2007–2009 financial crisis, it was not real exchange rate developments but rather demand compression that was at the heart of international rebalancing.
With this debate in mind, it is expedient to point out that CA-rebalancing is increasingly driven by export growth rather than import compression. Figure 2 shows how exports and imports of goods and services have fared since the beginning of 2008. The red line displays the evolution of the rolling 12-month sum of exports, while the blue line documents the evolution of the rolling 12-month sum of imports.
Three phases need to be taken into account when examining how exports and imports of goods and services have contributed to external adjustment since 2008: the great trade collapse, the recovery from this collapse, and the developments after the intensification of the European debt crisis in mid-2011.
Figure 2. Southern EZ’s exports and imports of goods and services
Source: BIS and Datastream.
First, during the great trade collapse,5 the increasing balance of goods and services trade was driven by the strong collapse of imports. From the peak in 10:2008 and until 10:2009, both exports and imports collapsed, but imports collapsed by around €55 billion more. From 10:2008 to 10:2009, the reason underlying the improvement of the Southern EZ’s CA balance was thus import compression.
Second, during the recovery from the great trade collapse that took place from 10:2009 to 07:2011, both exports and imports recovered, and did so at roughly the same rate, so that the balance of goods and service trade did not change. Exports increased by €90 billion and thus reached their pre-crisis level in 07:2011. During the same period of time, imports increased by nearly the same amount (€89 billion).
Third, in the time since 07:2011, the balance of goods and services trade increased sharply, which was primarily due to a strong export performance. After the recovery from the great trade collapse and including the most recent data (10:2013), exports grew by around €82 billion at an annualized rate, while imports decreased (by around €57 billion per annum).
Thus, over the last two years, the continued increase in the CA of the Southern EZ was more and more driven by export growth and less and less so by import compression. Since 07:2011, the Southern EZ’s CA balance has improved by around €139 billion on an annual basis, of which well over half can be attributed to export growth.
Inspection of the respective national data shows that this development is common across all four economies and for exports of both goods and services. The upper panel of Figure 3 displays the cumulative growth of goods exports since 07:2011. In the two-and a quarter years since then, exports grew an impressive 20% in Greece (blue line), 15% in Portugal (yellow line), 13% in Spain (red line), and 7% in Italy (green Line).
Figure 3. Growth of goods and service exports
Source: BIS and Datastream.
For services (see lower panel of Figure 3), the strong export performance is well underway in Italy and Spain and just beginning in Greece and Portugal. Italy and Spain have seen their service exports grow by over 10% since 07:2011. Growth started later than Portugal, and only very recently in Greece. In all four economies, the recent upswing in service exports is in particular due to tourism.6
These patterns point towards a fundamental stabilization of the EZ’s economic cohesion in the sense that the imminent recovery of domestic demand in the Southern EZ will not lead to the re-emergence of the large CA imbalances that prevailed before the financial crisis and that also contributed to the severity of the European debt crisis.7
Disclaimer: The views expressed here are those of the author and do not necessarily represent those of the Swiss National Bank.
1. Given that the data for Cyprus are missing, the Southern EZ is defined as Greece, Italy, Portugal, and Spain.
2. All figures in this column display rolling 12-month balances summed over the four economies in the Southern EZ. For example, in Figure 1, the green solid line plots the 12-month CA balance of the Southern EZ, which is equal to the sum of the 12 most recent monthly trade balances. This summation yields a monthly measure of the annualized balance that is unaffected by the strong seasonality of the data and short-term fluctuations. The same procedure is used to construct three subcomponents displayed in Figure 1.
3. The CA balance is equal to the sum of the services trade balance, the goods trade balance, the income balance, and the balance of current transfers. Since the latter are small, they are not included in Figure 1.
4. Auer (2013) examines how these CA balances and the sudden stop in private capital flows led to the emergence of large imbalances in the use of European Central Bank liquidity by the EZ’s national banking systems and the associated Target2 imbalances.
5. For a description of the patterns of world trade during this collapse, see Baldwin (2009) and the references cited therein.
6. These statements are also corroborated by a look at data from the IMF’s Direction of Trade Statistics, which show that the exports of the Southern EZ are also increasing relative to exports of all advanced nations; that is, these economies are gaining market share on global export markets.
7. Of course, these patterns also imply that the EZ as a whole could remain a large CA surplus area, as there are no signs that the CA surplus in the remainder of the EZ is diminishing at the current juncture.
Auer, Raphael (2013), “What drives Target2 Balances? Evidence from a Panel Regression?”, paper prepared for the 57th Panel Meeting of Economic Policy.
Baldwin, Richard (2009),“The great trade collapse: What caused it and what does it mean?”, VoxEU.org, 27 November.
Bems, Rudolfs and Julian di Giovanni (2014), “Income-Induced Expenditure Switching”, mimeo, CREI.
Friedman (2014), FT Insight, Financial Times print edition, 27 February.
Milesi-Ferreti, Gian Maria and Philip R Lane (2012), “External Adjustment and the Global Crisis", Journal of International Economics, 88(2): 252–265.
Sinn, Hans-Werner and Akos Valentinyi (2013), “European imbalances”, VoxEU.org, 9 March.