The Euro’s Effect on Trade Imbalances

31 Pages Posted: 1 Feb 2011

See all articles by Helge Berger

Helge Berger

International Monetary Fund (IMF)

Volker Nitsch

Darmstadt University of Technology - Department of Law and Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: October 2010

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.

Keywords: Balance of trade, Bilateral trade, Cross country analysis, Euro, Euro Area, Europe, Exchange rate regimes, Labor market policy, Time series

Suggested Citation

Berger, Helge and Nitsch, Volker, The Euro’s Effect on Trade Imbalances (October 2010). IMF Working Paper No. 10/226, Available at SSRN: https://ssrn.com/abstract=1750714

Helge Berger

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Volker Nitsch

Darmstadt University of Technology - Department of Law and Economics ( email )

Marktplatz 15
Residenzschloss
Darmstadt, 64283
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

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