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News : EU Economy Last Updated: Oct 2, 2012 - 9:43 AM

IMF says rise of Eurozone trade with China contributed to imbalances within single currency area
By Finfacts Team
Oct 2, 2012 - 8:38 AM

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The International Monetary Fund in a working paper says that the rise of Eurozone trade with China following the launch of the euro, contributed to imbalances within the single currency area.

In effect Germany had the product range to take advantage of rising demand in China while Chinese imports impacted enterprises in Southern Europe at a time when they also had to contend with competition from the former communist countries of Eastern Europe.  

The paper [pdf] says  that: "'In particular, exports of several Southern European countries were negatively affected by Chinese competition, while Chinese import demand provided little benefits to the trade balance of these countries. At the same time, the very sharp nominal appreciation of the euro compounded the well-documented losses in competitiveness of deficit countries within the euro area due to domestic prices and costs.

We also show that the current account deficits of euro area countries were mostly financed by euro area surplus countries, despite significant trade imbalances vis-à-vis the rest of the world. That is, in deficit countries trade imbalances vis-à-vis the rest of the world were financed by net lending from the core euro area. In turn, investors from outside the euro area increased their claims on countries such as Germany and France. This suggests a special role for intra-euro area financial integration in allowing for persistent current account imbalances."

The paper also says that current account balances in Greece, Ireland, Italy, and Spain worsened significantly during the first decade of European Monetary Union (EMU), while Portugal’s deficit remained at the very high levels it had reached early in the decade . As a result of the increasing recourse to external financing, net external liabilities of these countries rose sharply, reaching levels close to or above 100% of GDP (gross domestic product) by the end of 2010 in Greece, Ireland, Portugal, and Spain. During this period, Germany and a number of other smaller countries in Northern Europe progressively built large current account surpluses, with the current account for the Eurozone as a whole remaining in broad balance throughout the period.

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