Euro doomsters beware: rebalancing at work

The German trade surplus vis-à-vis the euro zone has all but vanished in 2013, highlighting the easing of the currency area’s internal imbalances. The fundamental causes of the crisis are in full-scale retreat. The euro zone is more flexible than sceptics want to believe.

The latest German trade data confirm that one of the fundamental causes of the euro crisis may be fading away. The long-standing intra-euro zone trade and current account imbalances are disappearing slowly but surely.

The progress is hidden behind the statistics’ headline numbers. Germany’s global trade surplus increased by 6.5 percent, to 80.3 billion euros, in the first five months of 2013. That’s much faster than the global economy’s growth during the same time. The overall gap is almost as large as it was in 2008, on the eve of the crisis.

Below the surface, however, the trade patterns within the monetary union are changing. From January to May 2013, Germany’s surplus vis-à-vis the rest of the euro area stood at merely 0.9 billion euros. It was 33 times larger five years ago. Back then, the euro zone accounted for 35 percent of Germany’s trade surplus. Today, it’s merely 1.1 percent.

The decline is the culmination of a trend that has developed since 2009. It is partly the flip side of excessive austerity in the periphery, which has weakened demand for German goods. From January to May, German exports to the rest of the euro zone were 4 percent lower than in the same period in 2008.

But recession in the periphery only explains a small part of the picture. From 2008 to 2013, German imports from the currency area rose 14 percent. Real wage gains in Germany and the country’s low interest rates were contributing factors. Another one was the periphery countries’ improving competitiveness.

The trend could intensify in the coming quarters. Domestic demand in Germany might get another kick as well. The country has been suffering from a corporate investment freeze in the last 18 months. This has created significant pent-up demand. When the uncertainty over the future of the euro zone disappears, German companies will increase their capex, which should bolster domestic demand and imports.

The shift of trade currents is already remarkable, especially given that euro members cannot devalue their currency to soften the burden of adjustment. All in all, that weakens the case of the euro doomsters, who keep insisting that Europe can only overcome its problems with flexible exchange rates. The currency area is indeed more flexible – and resilient – than sceptics want to believe.

This article was initially  published as a Reuters Breakingviews comment on 8 July 2013.