JW Mason — What Has Happened to Trade Balances in Europe?

It has gradually entered our awareness that the Greek trade account is now balanced. Greece no longer depends on financial markets (or official transfers, or remittances from workers abroad) to finance its imports. This is obviously important for negotiations with the "institutions," or at least it ought to be.... 

By 2013, the large majority of the euro area is in surplus, while not a single country has an excess of imports over exports of more than 5 percent. The distance above the diagonal line indicates the improvement from 2008 to 2013; this is positive for every euro-area country except Austria, Finland and Luxembourg, and the biggest improvements are in the countries with the worst ratios in 2008. The surplus countries, apart from Finland, more or less maintained their surpluses; but the deficit countries all more or less eliminated their deficits. 

So does this mean that austerity works? Yes and no. It is certainly true that Europe's deficit countries have all achieved positive trade balances in the past few years, even including countries like Greece whose trade deficits long predated the euro. On the other hand, it's also almost certainly true that this has more to do with the falls in domestic demand rather than any increase in competitiveness..

Still, the fact remains, trade deficits have almost been eliminated in the euro area. Liberal critics of the European establishment often say "not every country in Europe can be a net exporter" as if that were a truism. But it's not even true, not in principle and evidently not in practice. It turns out it is quite possible for every country in the euro to run a trade surplus....

The Slack Wire
What Has Happened to Trade Balances in Europe?
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

My comment there:

Tom HickeyMarch 2, 2015 at 11:17 PM

Liberal critics of the European establishment often say "not every country in Europe can be a net exporter" as if that were a truism. But it's not even true, not in principle and evidently not in practice. It turns out it is quite possible for every country in the euro to run a trade surplus.

Its only impossible for every country in a closed economy to run either a positive or negative current account balance simultaneously owing to accounting identity.

What it means for the EZ as a whole to be running a current account surplus is that other counties must offset this with a deficit.

Not all countries in the global economy can offset domestic private saving desire wrt to net financial assets through the external sector, without relying on fiscal deficits. So the result is some countries running current account surpluses and aiming at fiscal balance, while other must run current account deficits and fiscal deficits in that case.

China, Japan and Germany are chronic net exporters, and the EZ project is for the entire EZ to become a net exporter too. How long is that viable politically for countries that run chronic courant account deficits before there is a reaction?

Of course, it's not really an issue economically if other countries offset the resultant importation of unemployment in the form of embedded labor by running larger fiscal deficits to maintain effective demand sufficient for full employment, but that is considered to be a off the table politically in the currency environment. 74% in the US are favorable to a balanced budget amendment, for example (without understanding the consequences).

This doesn't appear to be a sustainable course for globalization given the current mindset, even though the net importers are getting the benefit in real terms, receiving other countries resources and having foreign workers to the work, too.

But if a country the like the US were smart, it would welcome the advantage in real terms and run a fiscal deficit sufficient to offset net saving desire and manage effective demand at full resource utilization including human resources. But that seem to be too much to ask politically in the current environment.