Chart of the week: Is external adjustment working in the euro area?

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Chart of the week: Is external adjustment working in the euro area?

In the sixth year of the crisis of the euro area, it is time to review whether adjustment to external imbalances in the euro area is working. Current

Publishing date: 12 March 2013
Authors: Guntram B. Wolff

In the sixth year of the crisis of the euro area, it is time to review whether adjustment to external imbalances in the euro area is working. Current accounts have dramatically adjusted in a number of countries of the euro area as the graph below shows. The one country showing virtually no adjustment is Germany and I will revert below to it. Is the dramatic adjustment in current account deficits a sign of success of the export sector or merely a reflection of a dramatic collapse in domestic demand due to the private sector deleveraging and the start of fiscal consolidation?

To answer the questions, the following chart is assessing the relative contributions of increases respectively decreases in imports and exports measured in percent of 2012 GDP. Ireland, Spain and Portugal show a spectacular export-driven adjustment. In all three countries, the increase in exports during 2007-2012 was far larger than the decrease respectively small increase of imports in Ireland. During the 5 years considered, current account adjustment was thus rather coming from exports than from a decline in imports due to a collapse of domestic demand. Greece is standing out with basically the entire adjustment coming from a huge decrease in imports. In Germany, both imports and exports grew by similar size so that no major change in the trade balance was recorded.

Two major policy lessons follow.

· First of all, if the euro area does not or cannot move to permanent current account surplus, then Germany should make a net contribution to demand by increasing imports more than exports. Given the demand deficiency in the euro area, there is a clear case for strengthening demand in Germany. This will further help re-balancing by increasing demand for exports from Ireland, Spain and Portugal in particular.

· Second, for the export sector to grow further in Spain, Portugal, Ireland but also Italy, it is important that the conditions for growth are fulfilled. Two things are needed for growth: Cheap access to credit to finance investment into new capacities as well as competitiveness of labour. The deep current fragmentation of the financial market and the divergence of financing conditions with significant risk premia paid by corporations located in the countries concerned is the single most important threat to further euro area adjustment. The banking union together with more aggressive monetary policy is needed.

About the authors

Guntram B. Wolff

Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB).

From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and advisory board of Elcano. He is also a fellow at the Kiel Institute for the World Economy.

Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media.