Budapest Post

Cum Deo pro Patria et Libertate
Budapest, Europe and world news

Europe racks up record trade deficit. Can it bounce back?

Europe racks up record trade deficit. Can it bounce back?

It’s not just Europe’s energy balance that has plunged into the red. Its manufacturing trade surplus has nearly halved.

Europe, the world's largest economic bloc, enjoyed stable trade surpluses for a decade but the war in Ukraine and the ensuing energy crisis have tipped the Continent into a spiraling external deficit unseen since the launch of the euro.

The terms-of-trade shock maxed out in August, the latest month for which trade figures are available. And, even though energy prices have since eased, European leaders are still scrambling to shore up supplies of affordable oil and gas to replace lost Russian deliveries. A harsh winter looms.

A breakdown of the trade figures shows that the EU's manufacturing trade surplus has nearly halved this year.

Can Europe bounce back? Or will its industrial base become hollowed out as industry moves offshore? And will the eurozone, and the EU more broadly, end up being saddled with the chronic external deficits that have long plagued the United States and, more recently, destabilized Britain? POLITICO breaks it down for you:

What’s going on?


The eurozone’s negative trade balance with the rest of the world in August stood at €50.9 billion, the highest deficit ever recorded, compared to a €2.8 billion surplus a year ago, according to the latest Eurostat numbers.

The trade deficit for the EU as a whole spiraled to €64.7 billion.

The eurozone’s current account balance — the balance of all trade in goods and services as well as international transfers of capital, such as remittances — hit a €26.32 billion deficit in August, largely driven by the trade deficit in goods, the European Central Bank reported.


Is that a bad thing?


A trade deficit occurs when a country or trading bloc’s imports exceed its exports. A trade surplus is the opposite. Trade deficits are not per se good or bad, although many countries seek a trade surplus, including by setting up tariffs and quotas to artificially boost their trade balance, a practice known as mercantilism.

Is it temporary?


The trade deficit is largely driven by high energy prices, which in August hit a record €350 per megawatt hour. Prices have come down from their peak, trading at around €150/MWh, but they are still a multiple of where they were a year ago.

“Markets have gone from pricing this energy crisis as being temporary, they are now pricing it to be a much longer-term story, albeit not as elevated as it was in August,” said Kristoffer Kjær Lomholt, chief FX analyst at Danske Bank.

“We think that it is a kind of a more long-term thing that is going to weigh on the currencies of economies that are energy importers, where the eurozone, of course, stands out to a very large extent,” he added.

Others believe that the shift, being largely energy related, could resolve itself over time, said Sam Lowe, who covers trade policy at Flint Global.

An EU official also pointed to EU-Russia trade. “The peak in energy prices has made the value of our imports from Russia increase substantially (while the volume of those imports from Russia decreased), and our exports have spiralled down because of sanctions (export controls),” the official said.


Will the EU be less competitive if energy prices remain high?


A negative trade balance and consequently a weaker currency makes imports more expensive. “Net importers will have to pay more for goods and services,” said Lomholt.

On the other hand, a weaker euro could fuel exports, said Matthias Krämer, head of external economic policy at German industry federation BDI. “If the euro currency was a little bit weaker, it could also make Europe’s position on global markets better by making exports cheaper,” he said.

But there’s another way of looking at this. Lowe argued the sustained large eurozone trade surplus was itself problematic, in that it was a function of intra-EU demand being lower than it should be. “Being overly dependent on external demand also leaves the EU quite vulnerable to both external shocks, and political coercion.”

What does that mean for the euro?


“We expect the euro to decline further in coming months as part of this adjustment,” said Robin Brooks, chief economist at the Institute of International Finance.

A negative trade balance or current account deficit puts downward pressure on the value of free-floating currencies, which move with demand of goods: less demand for a country’s exports means less demand for its currency, which in turn lowers its value relative to others. Conversely, strong foreign demand for goods strengthens a country’s currency.

“Foreign investors need to be compensated via a real depreciation of the exchange rate, and generally higher real interest rates,” said Lomholt at Danske Bank.

The Danish lender has recently downgraded its forecast for the € to $ exchange rate to $0.93 in 12 months from virtual parity now, driven in part by the energy price shock. “We have for some time been arguing that €/$ looked overvalued and not undervalued … And just given the additional push to the energy crisis that we got during summer, we saw a case that the euro/dollar [exchange rate] should actually hit even lower,” he said.

Is business freaking out?


A bit.

“The data are not so surprising considering the high energy prices, but they are worrying”, said Luisa Santos, responsible for international relations at BusinessEurope. She called on the EU to try to bring energy prices down and to boost exports by opening new market opportunities via more trade agreements.

Germany, the bloc’s export powerhouse, increased its exports by 14 percent in the first eight months of the year but imports have surged by more than 27 percent, according to national trade figures.

“We’re not performing in a segment which is highly influenced by a cost driven competition,” said Krämer at the German industry federation. “But if this situation will last longer of course some parts of our industry will be more and more under pressure.”

AI Disclaimer: An advanced artificial intelligence (AI) system generated the content of this page on its own. This innovative technology conducts extensive research from a variety of reliable sources, performs rigorous fact-checking and verification, cleans up and balances biased or manipulated content, and presents a minimal factual summary that is just enough yet essential for you to function as an informed and educated citizen. Please keep in mind, however, that this system is an evolving technology, and as a result, the article may contain accidental inaccuracies or errors. We urge you to help us improve our site by reporting any inaccuracies you find using the "Contact Us" link at the bottom of this page. Your helpful feedback helps us improve our system and deliver more precise content. When you find an article of interest here, please look for the full and extensive coverage of this topic in traditional news sources, as they are written by professional journalists that we try to support, not replace. We appreciate your understanding and assistance.
Newsletter

Related Articles

0:00
0:00
Close
Ukraine Declares De Facto War on Hungary and Slovakia with Terror Drone Strikes on Their Gas Lifeline
A monster hit and a billion-dollar toy empire
Animated K-pop Musical ‘KPop Demon Hunters’ Becomes Netflix’s Most-Watched Original Animated Film
Canada: Nurse Suspended and Fined 93 Thousand Dollars After Stating the World’s Most Well-Known Fact Since the Creation of Adam and Eve, That There Are Only Two Genders
Elon Musk tweeted, “Europe is dying”
Far-Right Activist Convicted of Incitement Changes Gender and Demands: "Send Me to a Women’s Prison" | The Storm in Germany
Hungary Criticizes Ukraine: "Violating Our Sovereignty"
Will this be the first country to return to negative interest rates?
U.S. Treasury Secretary Whitney Bessent Backs Stablecoins to Boost Treasury Demand
Spain to Declare Disaster Zones After Massive Wildfires
Three-Minute Battery Swap Touted as Future of EVs
Beijing Military Parade to Showcase Weapons Advances
U.S. Tech Stocks Slide on AI Boom Concerns
White House Confirms Talks Over Intel Stake
Trump Suggests U.S. Could Support Ukraine ‘By Air’
Trump Called Viktor Orbán: "Why Are You Using the Veto"
Horror in the Skies: Plane Engine Exploded, Passengers Sent Farewell Messages
AI in Policing: Draft One Helps Speed Up Reports but Raises Legal and Ethical Concerns
Shame in Norway: Crown Princess’s Son Accused of Four Rapes
Apple Begins Simultaneous iPhone 17 Production in India and China
A Robot to Give Birth: The Chinese Announcement That Shakes the World
Finnish MP Dies by Suicide in Parliament Building
Outrage in the Tennis World After Jannik Sinner’s Withdrawal Storm
Class Action Lawsuit Against Volkswagen: Steering Wheel Switches Cause Accidents
UK Government Tries to Sue 4chan for Breaching Online Safety Act
Dogfights in the Skies: Airbus on Track to Overtake Boeing and Claim Aviation Supremacy
Tim Cook Promises an AI Revolution at Apple: "One of the Most Significant Technologies of Our Generation"
Are AI Data Centres the Infrastructure of the Future or the Next Crisis?
Miles Worth Billions: How Airlines Generate Huge Profits
Cambridge Dictionary Adds 'Skibidi,' 'Delulu,' and 'Tradwife' Amid Surge of Online Slang
Zelenskyy Returns to White House Flanked by European Allies as Trump Pressures Land-Swap Deal with Putin
The CEO Who Replaced 80% of Employees for the AI Revolution: "I Would Do It Again"
"Every Centimeter of Your Body Is a Masterpiece": The Shocking Meta Document Revealed
Character.ai Bets on Future of AI Companionship
China Ramps Up Tax Crackdown on Overseas Investments
Japanese Office Furniture Maker Expands into Bomb Shelter Market
Intel Shares Surge on Possible U.S. Government Investment
Hurricane Erin Threatens U.S. East Coast with Dangerous Surf
EU Blocks Trade Statement Over Digital Rule Dispute
EU Sends Record Aid as Spain Battles Wildfires
Beijing is moving into gold and other assets, diversifying away from the dollar
China Requires Data Centres to Source Majority of AI Chips Locally, For Technological Sovereignty
Escalating Clashes in Serbia as Anti-Government Protests Spread Nationwide
Category 5 Hurricane in the Caribbean: 'Catastrophic Storm' with Winds of 255 km/h
Trump Backs Putin’s Land-for-Peace Proposal Amid Kyiv’s Rejection
Digital Humans Move Beyond Sci-Fi: From Virtual DJs to AI Customer Agents
YouTube will start using AI to guess your age. If it’s wrong, you’ll have to prove it
Jellyfish Swarm Triggers Shutdown at Gravelines Nuclear Power Station in Northern France
OpenAI’s ‘PhD-Level’ ChatGPT 5 Stumbles, Struggles to Even Label a Map
Zelenskyy to Visit Washington after Trump–Putin Summit Yields No Agreement
×