EU MEMBER STATES AND NEGATIVE TRADE BALANCES

In July 2011,  16 EU Member States’ were showing trade deficits: Austria, Bulgaria, Cyprus, Estonia, France, Greece, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Romania, Slovenia, Spain and the United Kingdom.

A trade account deficit may be a symptom of a wider structural economic problem i.e. a loss of competitiveness in foreign markets, insufficient investment in new capital or a shift in comparative advantage towards other countries.

A widening negative trade balance may result in lost output and employment because it represents a net leakage from the circular flow of income and spending. Workers who lose their jobs in export industries, or whose jobs are lost because of a rise in import penetration, may find it difficult to find new employment.

Countries experiencing negative trade balances cannot always rely on inflows of financial capital into an economy to finance a current account deficit. Foreign investors may eventually take fright, lose confidence and take their money out. Or they may require higher interest rates to persuade them to keep investing in an economy. But higher interest rates then have the effect of depressing domestic consumption and investment.

A declining currency would help stimulate exports but the rise in inflation and interest rates would have a negative effect on demand, output and employment.

Countries experiencing trade deficits must improve their cost and price competitiveness and there is a need for a multi-pronged approach to reduce trade deficits. There is no silver bullet. Greater emphasis on energy independence, investment in innovation, government fiscal discipline, and engagement with China on exchange rates Yuan-Euro that are unfavourable to European companies  are all key elements of this multi-pronged approach.

The European Union should show concern about high deficits in extra-EU trade, particularly if those deficits lead to diminution of industrial production per capita, particularly if dismantling EU´s industry is not accompanied by an increase in the International Investment Position or in other variables that can guarantee sustained development. European Economic Policies should be addressed to diminish deficit in extra-EU balance for the EU as a whole and to make sustainable the intra-EU imbalances among countries. Sustainability presents two options: 1) all EU countries would promote industrial development to a degree enough to guarantee real convergence with the most advanced economies. 2) The European Union would guarantee flows of credit from EU countries with surplus to EU countries with deficit, like among different regions of a single country. The European Parliament and Commission may choose a mix of both options, but they should offer to all EU countries opportunities for sustainable development.