The aim of this work is to assess the factors that have been affecting the imbalances of trade within countries of the European Union. The analysis takes into consideration the elements that could affect the balance of trade, thus saving or investment. The variables that are included in the panel data framework are related to productivity, inflation, consumption, wage level, capital movements, demography of the population, economic growth, public and private debt levels. A panel data, that leaves out countries from East Europe, is created, and takes values that go from 2002 to 2013.
The panel data shows that technology gaps and capital movements have been the main factors that affected the balance of trade of the peripheral countries. Peripheral countries did not invest enough in projects that could enhance the productivity, leading to a competitiveness loss that was not followed by a correction of the wage levels. Moreover, capital movements have been financing consumption surges in Greece and Portugal, whereas in Spain and Ireland those capitals have fueled credit booms and house bubbles. Therefore, those countries have been experiencing a worsening of their balance of trade, and investors have not been willed anymore to finance additional debt. Indeed, Members of the euroarea could not guarantee that the central bank could play the role of lender of last resort. Knowing that, in a currency union, the external position of a country represents its capacity of producing goods and services that could serve the debt in a troubled time, in the eyes of the investors the balances of trade of the peripheral eurozone countries became relevant during the European sovereign debt crisis.
In the European framework, in order to decrease the imbalances of trade within the Members, fiscal transfers to peripheral countries could be beneficial for decreasing the cost that peripheral countries need to undergo during the adjustment period, whereas reforms that aim to enhance productivity in the peripheral countries and increase the mobility and the flexibility of the product and labor markets could be highly helpful. The following work highlights all those elements in a empirical framework, relating, however, the results to the literature that has been developed around the European case and the optimum currency area.
Table of Contents
1 Introduction
2 The balance of trade within the Members of the European Union
2.1 Problems with the management of the European Integration
2.2 Trade imbalances
3 Literature review
3.1 The financial markets integration and the intertemporal approach
3.2 The competitiveness approach
3.3 Labor and product market flexibility
4 The empirical investigation
4.1 Assessing the main determinants
4.2 Data gathering
4.3 Results
5 Policy implications in the European framework
5.1 Interpretation of the results
5.2 The Maastricht treaty and the optimal currency area theory
5.3 The euroarea: ex-ante and ex-post considerations
6 Conclusion
Research Objectives and Core Themes
This thesis aims to assess the primary determinants of trade imbalances among European Union member states. By analyzing a panel dataset covering the period from 2002 to 2013, the research investigates how factors such as productivity levels, capital movements, consumption patterns, and fiscal policies have contributed to persistent trade disparities and exacerbated the impact of the European sovereign debt crisis.
- The impact of capital movements and technology gaps on trade balances in peripheral Eurozone countries.
- The effectiveness of the Maastricht Treaty and the Stability and Growth Pact in monitoring structural economic imbalances.
- The relationship between labor market rigidities, wage growth, and international competitiveness.
- The role of coordinated economic policies and fiscal transfers in mitigating trade imbalances within a currency union.
Excerpt from the Book
3.1 THE FINANCIAL MARKETS INTEGRATION AND THE INTERTEMPORAL APPROACH
The first signal of concern about structural trade imbalances is provided by Blanchard and Giavazzi (2002). In their work, they observe that Portugal and Greece were, in 2000-2001, respectively, recording a current account deficit of 10 and 7 percent of their GDP. They argue that, since Portugal and Greece were, in 2002, the two poorest members of the European Union, what was occurring was a natural consequence of the greater integration of goods and financial markets in the EU. Since Portugal and Greece were the poorest countries of the EU, they were the countries with higher expected rates of return, therefore they would have registered an increase in investment. Moreover, since they were the countries with better growth prospects, they would have also recorded a decrease in saving, because households would have been expecting an increase in their permanent income, thereby starting to consumer more.
Thus, poorer countries are expected to run larger current account deficits, however, symmetrically, richer countries are expected to run larger current account surpluses, since they would not invest saving domestically, but abroad where the returns are expected to be higher.
Blanchard and Giavazzi demonstrate, through a panel data from countries participating in the Organization for Economic Cooperation and Development (OECD) that saving rather than investment is the main channel through which integration affects current account balances. They conclude that, in Portugal and Greece, lower private saving, due to both internal and external financial market liberalization but also to better future growth prospects, and, to a lesser extent, higher investment, appear to be the main drivers of the larger current account deficits. Thereby, they suggest that countries such as Portugal and Greece should not take measures to reduce their deficits.
Summary of Chapters
1 Introduction: Provides an overview of the economic crisis in 2009 and its negative impact on the European Union, highlighting the public debate regarding cultural and financial aspects.
2 The balance of trade within the Members of the European Union: Discusses challenges in managing European integration, specifically focusing on the free movement of capital and goods and the resulting structural unbalances.
3 Literature review: Examines academic perspectives on financial market integration, the competitiveness approach, and the importance of labor and product market flexibility.
4 The empirical investigation: Details the construction of the panel data and the econometric methodology used to identify the determinants of bilateral trade imbalances.
5 Policy implications in the European framework: Analyzes the interpretation of regression results and evaluates the shortcomings of the Maastricht Treaty in the context of optimal currency area theory.
6 Conclusion: Summarizes the key findings, emphasizing the need for coordinated economic policies and structural reforms to ensure the stability of the Eurozone.
Keywords
Trade imbalances, European Union, Eurozone, sovereign debt crisis, capital movements, labor productivity, current account, Maastricht Treaty, fiscal policy, wage rigidity, competitiveness, economic integration, panel data analysis, optimal currency area, investment.
Frequently Asked Questions
What is the primary focus of this thesis?
The thesis investigates the factors causing persistent trade imbalances among European Union countries, specifically looking at the period before and during the European sovereign debt crisis.
What are the central themes of the work?
Key themes include capital movements, technology gaps between member states, the role of institutional frameworks like the Maastricht Treaty, and the influence of labor and product market rigidities on trade performance.
What is the main research objective?
The goal is to determine which economic variables significantly impact bilateral trade balances within the EU and to assess whether these imbalances were natural outcomes of integration or structural defects exacerbated by the currency union.
Which scientific methodology is utilized?
The author employs an empirical framework using panel data covering the years 2002 to 2013, applying regression analysis to identify significant determinants of bilateral trade.
What is covered in the main body of the work?
The main body includes a literature review on financial integration, a detailed empirical investigation of trade determinants, and a discussion on policy implications for the Eurozone.
Which keywords best characterize this research?
The research is characterized by terms such as trade imbalances, sovereign debt crisis, capital movements, fiscal policy, and competitiveness.
How did the Euro affect peripheral countries?
The introduction of the Euro led to a convergence of interest rates and increased capital inflows to peripheral countries, which, rather than fostering productivity, often fueled consumption surges and credit bubbles.
Why did the Maastricht Treaty fail to prevent the crisis?
The author argues that the treaty focused primarily on public debt and deficit limits, neglecting critical indicators like private debt, house price bubbles, and productivity divergences, which were early warning signs of the crisis.
- Citation du texte
- Valerio Zoccante (Auteur), 2015, Analysis on the trade imbalances within the European Union, Munich, GRIN Verlag, https://www.grin.com/document/302136
