How to deal with persistent trade imbalances within the eurozone

Updated: Mar 7, 2019

The EU should make eurozone member states running persistent trade surpluses within the euro area pay a penalty. The EU’s existing Macroeconomic Imbalance Procedure should be toughened by imposing a fine on surplus countries equivalent to 3 percent of the value of the surplus. At current levels of surpluses, this would result in an annual fine of roughly €4 billion for the Netherlands and €2 billion for Germany.

Marco Meyer argues that some eurozone members (Germany, the Netherlands, Belgium) export much more to other member states than they import. Others (France, Greece) import much more from eurozone member states than they export. Trade imbalances within the eurozone drive unsustainable debt levels in deficit countries. Within the eurozone, states cannot tackle trade deficits by devaluing their currency. Therefore, surplus and deficit countries should share the burdens of reducing trade imbalances by implementing fiscal and structural reforms.


Over the last ten years, the economies of eurozone member states have moved in different directions. The gross domestic products of eastern and northern member states have grown considerably – Germany’s for instance by 13 percent, the Netherland’s by 9 percent. By contrast, Spain’s GDP is a meagre 3 percent bigger than it was in 2008. Portugal’s economy has shrunk by 1 percent, Italy’s by 5 percent. The last ten years have wiped 25 percent off the size of Greece’s GDP.


Europeans who see their economies shrink may understandably worry whether the eurozone is rigged against them. But the fact that growth varies between eurozone countries is not in and of itself unjust. Whether adversely affected members have reason to complain against other member states or EU institutions depends on the causes of the negative economic outcomes they suffer. Among EU countries, the economies of eurozone members states are the most interdependent. Because they share the same currency, euro states cannot use monetary policy to mitigate the impact that developments in other euro states have on them. In particular, they cannot buffer unsynchronised economic downturns by lowering interest rates and thus the external value of their currency. This lack of scope for monetary policy action in eurozone member states can give rise to two different kinds of injustice. First, some eurozone member states may behave badly towards other members. Second, the rules governing the eurozone may be unfair.

Critics often claim that some member states behave badly. The culprits are persistent net exporters within the eurozone, i.e. countries that export more goods and services to other euro states than they import from other euro states. I will call net exporters within the eurozone surplus countries; the Netherlands, Germany, and Belgium are the primary exponents. I will call net importers within in the eurozone, such as Greece and France, deficit countries. Note that we are focusing on surpluses and deficits with other eurozone members only. Some member states, such as Germany, run large surpluses with the rest of the world, as well. The reason to focus on the trade balance with members of the eurozone is that deficit countries in other currency areas have monetary policy at their disposal to counteract trade imbalances. By devaluing their own currency against the euro, deficit countries can make their own goods and services more competitive in the eurozone while making goods and services from the eurozone less competitive in their home market. Exports will rise; imports will fall.

Is it all Germany’s fault? In essence, critics maintain that surplus countries reap economic benefits by disadvantaging their neighbours. The idea produces headlines such as this one from the The Independent in 2015: “Who is responsible for the eurozone crisis? The simple answer: Germany”. The author, economist Simon Wren-Lewis, maintains that Germany pursues a beggar-thy-neighbour policy by running large trade surpluses: “German officials would like you to believe that [Germany’s] relative success indicates the soundness of German economic policies, but what they do not tell you is that undercutting their eurozone neighbours was critical to this success."

Wren-Lewis is right that we should pay more attention to trade imbalances within the eurozone. But blaming individual countries misses the point. First, there are legitimate reasons for states to want to run trade surpluses. Ageing populations, such as Germany’s, may want to export more now and use surpluses to buy shares in profitable companies in demographically stable nations, such as France, to prepare for the time when a smaller workforce will produce less. Running surpluses for a period can thus serve the function of a pension plan on the level of a national economy. Second, within the rules of the single market, a member state cannot manage the level of imports and exports at will, even if this were desirable.

The proposal Rather than moralising about the behaviour of individual countries, we should give euro states monetary incentives to keep trade balanced. Both surplus and deficit countries should share the burden of reducing trade imbalances. The European Commission already monitors trade imbalances within the eurozone under its Macroeconomic Imbalance Procedure, admonishing both persistent deficit and persistent surplus countries. But the procedure has no teeth. I propose to toughen it up by forcing persistent surplus countries to spend surpluses in deficit countries or to make a payment to the tune of 3 percent of the value of their trade surplus with other euro states. My proposal would strongly incentivise surplus countries to increase imports from deficit countries on pain of having to pay up. As things stand, Germany would have had to pay roughly €2 billion for its surplus in 2017. The proposed rule would have two effects. First, it gives surplus countries an incentive to reduce their trade surpluses. While member states cannot directly control the level of imports and exports at will, they can influence them all the same. For instance, surplus countries can stimulate wages or increase public spending in order to increase domestic demand and the price of domestic goods. Second, if surplus countries pay up, the money can be used to support deficit countries in carrying out structural reforms, thereby easing the burden of adjustment. The rule needs to be adjusted to account for the fact that some countries, such as the Netherlands, act as conduits for imports from the rest of the world to EU member states, which inflates its trade surplus with other eurozone member states. The case of Germany is straightforward, though, as Germany runs a surplus with other eurozone countries as well as with the rest of the world.


Justification of the proposal Critics are correct to maintain that the cards in the eurozone are unfairly stacked against deficit countries. But debates about who is to blame risk to obscure the bigger question of how the rules governing the eurozone should be designed. The real reason why the current rules are unjust is that they place the burden for rebalancing trade entirely on deficit countries. The following example shows how persistent surpluses can develop within the eurozone. It also shows that deficit countries have the fewest means available to rebalance trade, such as by adopting policies that unduly hurt other deficit countries as well as the eurozone as a whole.

Consider Surplus, a large euro member state. Surplus’ economy grows moderately, yet wages are stagnant. Moreover, Surplus’ government prioritises reducing public debt over public investment. How does Surplus impact the rest of the eurozone? If wages in Surplus grow slower than productivity, goods produced in Surplus get cheaper. Lower prices make goods from Surplus more attractive abroad, leading to an increase in exports. At the same time, subdued wage growth in Surplus dampens demand from people in Surplus both for domestically produced goods and for imports from other member states. Since Surplus’ government does not spend much either, demand tanks. In effect, other member states buy more goods from Surplus and export less to Surplus than they otherwise would. This dynamic is likely to lead to a trade surplus in Surplus as well as a corresponding deficit elsewhere in the eurozone.

Crucially, deficit countries cannot rebalance trade by emulating Surplus. The reason is that Surplus’ policy of supressing demand at home relies on strong demand abroad. If deficit countries restrain demand at home as well, aggregate demand in the eurozone dwindles further. Emulating surplus countries may balance trade at an ever-lower level, but at the cost of plunging the entire eurozone into recession.


“Surplus”, of course, is but a thinly disguised Germany in the eyes of many critics. Whether this is a fair description of Germany’s role in the eurozone is, however, controversial. Some point out that Germany’s surplus with other eurozone members is in fact shrinking fast (in contrast to its surplus with the rest of the world, which is widening). Others dispute that the analysis correctly captures the causes of Germany’s trade surplus with other eurozone countries. Fortunately, we can leave these questions open. All that matters is that trade imbalances could plausibly come about as sketched, and that current rules provide no incentive for surplus countries to rebalance trade volumes.


Within the eurozone, member states cannot pursue an independent monetary policy to counteract trade deficits. Within the rules of the wider EU single market, member states do not have the option to impose tariffs on imports, either. Hence, net importing countries within the eurozone can do little to rebalance trade. Yet, persistent large trade imbalances within the eurozone are dangerous for both deficit and surplus countries. Trade deficits need to be financed. Trading partners in deficit countries usually pay up by incurring debt or other financial liabilities. The levels of both public and private debt, though, are already perilously high within the eurozone, particularly in southern member states. The danger for countries that run deficits in both trade and public finance is to slide into bankruptcy. If, however, deficit countries default on their debt, surplus countries would see their savings wiped out and their economic models collapse.

Some objections One objection that came up in the Twelve Stars online debate is that governments cannot control the trade balance. The balance of trade is an expression of countless decisions of economic agents to buy and sell. National governments cannot stop these decisions short of resorting to the imposition of trade barriers prohibited by the rules of the single market.

My first response is that national governments have a range of policy options to reduce trade surpluses that are perfectly compatible with the rules of the single market. These include increasing public investment, raising minimum wages, and increasing the salaries of public-sector workers. My proposal would give governments in surplus countries an incentive to pursue such policies. My second response is that even if surplus countries can do nothing to reduce trade imbalances, we still need to find a way of managing those in the eurozone. The rules of the single market and membership in the currency union severely constrain the options of deficit countries to counteract trade imbalances in ways that are productive for the eurozone as a whole. Yet trade imbalances need to be tackled. Giving surplus countries incentives to boost domestic demand as well as forcing them to make payments would enlist their support in tackling trade imbalances.


Another objection that came up in the Twelve Stars online debate is that my proposal is not the best way to rebalance trade within the eurozone. There are two alternative proposals. One is to loosen the ties between member states by giving up the euro as a shared currency. The EU would remain a free trade area, but member states would be free to pursue an independent monetary policy. Another proposal is to further deepen cooperation within the eurozone by strengthening the authority of the European Parliament over national budgets and by implementing a European social security system. This proposal would not do away with trade imbalances, but it would make them less worrisome because imbalances within the eurozone could be offset by transfer payments, as is currently the case for trade imbalances within member states.

I acknowledge that both proposals would be alternative ways of tackling trade imbalances within the eurozone. But the first alternative gives up too much, and the second is not yet politically feasible. Giving up the common currency would remove a force for convergence within the eurozone. It is also doubtful that most member states would gain much effective policy space when it comes to monetary policy. If the economic ties between member states remain as close as they are today, most members would likely have to follow the monetary decisions of large and powerful member states, such as Germany, much like they did back in the era of the Deutschmark. This would be a worse outcome for smaller members because the German Bundesbank would be mandated to set monetary policy that is optimal for Germany rather than for the members of the erstwhile eurozone.

I am sympathetic to the second alternative proposal of deepening integration in the eurozone to include oversight of national budgets by the European Parliament and larger transfers between member states, which could be used to offset trade imbalances. My proposal is perfectly compatible with deepening the European Union in these ways. I doubt, though, that such deepening is currently politically feasible. I see my proposal as a more realistic way to rebalance trade within the EU, which may become a step on the path towards a closer union.


Online Debate

On 16 June 2018, Marco Meyer defended his proposal in the Twelve Stars debate. The main objections are presented below. Rebuttals can be followed in the online debate.

Background Research

Read up on current initiatives and proposals concerning this topic in our background briefing.


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