Euro weakness, uneven eurozone exports
The growth of eurozone exports in April-May was modest, rather than spectacular, and uneven across individual euro-member states. While a cheaper euro has likely helped boost peripheral eurozone economies’ exports and this may become more obvious in forthcoming data, other factors – including weak emerging market demand – are clearly also at play.
Let’s start with a remarkable fact. The average EUR/USD exchange rate in 2014 was 1.3285. In 2013 it was…1.3284. Bottom line is that it was exactly the same, to the third decimal point (see Figure 1). But year-to-date it has averaged only 1.114 and reignited the hope that a more competitive euro will spur eurozone exports and growth.
Eurozone trade surplus with rest of the world near record highs
The eurozone has been a net exporter of goods to the rest of the world since 2012 (see Figure 3). Thanks to both robust exports and weak imports this surplus rose sharply from July 2014 to January 2015 – too early to be attributable to euro weakness which only gathered pace in late 2014.
There is some evidence that exports of goods and services, which edged higher in April-May, are benefiting from a more competitive currency. The euro-value of eurozone exports of goods to countries outside the eurozone (i.e. countries which don’t have the euro as their currency) was up about 14% quarter-on-quarter annualized in March-May (see Figure 4), although the volume of exports was up only 3.8% qoq annualized in February-April (see Figure 5). This points to positive price effects as well as a modest improvement in the underlying volume of goods sold abroad.
Similarly, the euro-value of the eurozone’s services exports has risen in recent months after a lacklustre start to 2015, with growth broadly in line with the five-year average (see Figure 6) and with the growth in goods exports (see Figure 7).
Uneven performance of individual eurozone countries’ exports
Figures 8 and 9 show the size of countries’ export sectors relative to GDP (y-axis) and the performance of goods exports in recent months (x-axis).
- Countries in the top right quadrant have large export sectors which have performed well in recent months. Perhaps unsurprisingly this includes Germany. Ireland’s exports were strong in March-April 2015, which is why the year-on-year growth rate is high (Figure 8), but exports dipped in May which is why the quarter-on-quarter growth rate is actually negative (Figure 7).
- Countries in the bottom right quadrant have large export sectors which have not performed so well in recent months. These include Latvia, Lithuania and Estonia, where exports have been dented by weak demand from core trading partners including Russia.
- Countries in the top left quadrant have relatively small export sectors which have performed well in recent months. These include Italy and Spain. Greece’s exports have picked up in recent months but are still depressed versus a year ago. Cyprus and Malta, which I do not include in Figures 8 and 9, have relatively small export sectors (see Figure 11) which have performed very strongly. The euro-value of their goods exports was up 58% yoy and 54.5% yoy, respectively, in March-May.
- Countries in the bottom left quadrant have relatively small export sectors which have not performed so well in recent months. These include Finland.
I see four plausible explanations as to why eurozone export growth has so far not been more pronounced and widespread: the more recent and muted fall in the euro NEER, FX-hedging lags, weak international demand and other factors beyond price impacting exports.
Euro NEER has only recently weakened (and not collapsed)
First, while EUR/USD has plummeted 18% in the past year, the euro exchange rate versus the eurozone’s main trading partners – the nominal effective exchange rate (NEER) – has held up much better and is down only 6.2% year-on-year (see Figure 2). This is of course due to the weakness of currencies such as the Russian rouble, Brazilian Real, Turkish lira and currencies of central Europe (see Figure 10).
Moreover, the euro NEER started to weaken about six months after EUR/USD started to tumble (see Figure 2). Therefore, the benefits of a more competitive euro may not have yet fully fed through to export data only available until May 2015 (euro-terms) and April 2015 (volume-terms). Medium & large companies often enter into multi-month (or even year) FX hedging arrangements with their trading partners and therefore do not immediately or fully benefit (or lose out) from exchange rate moves. Similarly, tourists typically book their holidays months in advance and may therefore in the near-term not be in a position to alter their travels plans to benefit from a cheaper euro. June export data are due for release on 17 August.
Weak emerging market demand
Weak global demand, particularly from emerging markets, has clearly weighed on eurozone exports. I wrote about the slump in Chinese imports (and exports) in Chinese Trade Tantrum but of course the economic turmoil in other large EM economies, including Brazil, Russia and Turkey – key trading partners for a number of eurozone countries – will have worked against a more pronounced recovery in eurozone exports (see Figures 11 and 12). For example, all eurozone economies have at least 5% of their exports going to China (in the case of Germany, Netherlands and Finland the share is double that). I will tackle this topic in my next research note.
Price is not everything
Finally, a competitive currency is but of one many variables, and not necessarily the most important, driving exports. Quality, choice, innovation, ability to deliver and after sales service are key factors behind successful sales and exports. This is certainly an argument that German exporters have made and Germany posted the world’s largest current account surplus in 2014 (€215bn) despite the euro not being particularly competitive.
Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.
 Using average daily exchange rates at close
 Ideally we would extend this analysis to include the exports of services (including tourism), but detailed and timely data for services exports outside of the eurozone are not available.