Brussels, 24 June 2010
Quarterly Report on the Euro Area focuses on challenges ahead for Euro area exporters
Euro-area exports, their pre-crisis performance and the challenges lying ahead, is the theme of the focus section of the second issue of the Quarterly Report on the Euro Area in 2010. During the decade preceding the crisis, euro-area exporters benefited from robust growth in neighbouring emerging markets and a strong specialisation in some key export sectors that acted as powerful export drivers. Their relatively strong competitive position augurs well for their capacity to exploit the opportunities offered by the ongoing recovery in world trade. This will, however, require tackling a number of important challenges revealed by the crisis. By creating incentives for innovation and improving the business environment policy-makers can help companies face these challenges. In addition to trade, the report also sheds new light on the causes of the recent recession in the euro area and the impact of the crisis on cyclical convergence between euro-area Member States.
The recent crisis and the severe turbulences in world trade have drawn the attention to the role of the external sector in propagating shocks. The focus section of the report looks in more detail into the export sector of the euro area and tries to assess its strength and weaknesses with a view to better understanding its likely performance in the post-crisis world. The report finds that the export performance of the euro area was relatively strong in the decade before the crisis. This is all the more remarkable that the euro was on a broad appreciating trend during this period.
The roots of the relatively strong export performance of the euro area lie in the structural features of its export sector. Euro-area exporters benefited from a strong position in fast growing neighbouring destinations such as Russia and the new EU Member States. The product structure of euro-area’ exports, although it shows less specialisation in ICT products and more concentration in labour-intensive goods than US or Japan, proved rather conducive to growth. In particular, euro-area exporters performed well in some key export sectors, which acted as strong export drivers. Among those are high-tech sectors such as pharmaceuticals, for which world demand has been growing fast, but also medium-tech, slower-growing sectors such as machinery and transport, in which the euro area has gained market shares. There is also evidence that exporters have weathered competition by specialising in the production of the higher-quality segments of a particular product group.
Notwithstanding the relatively good pre-crisis performance, euro-area exporters have been strongly affected by slump in world trade during the crisis. The post-crisis world is also likely to bring a number of challenges. First, emerging economies in Asia and Latin America are set to gain importance in world trade. This will open new opportunities for exporting companies in advanced economies but, at the same time, enhance competition on globalised markets. Second, the need for balance-sheet adjustment in some important trade destinations of the euro area, such as in Eastern Europe or the US, will potentially have a lasting negative effect on foreign demand for euro-area exports. Finally, the crisis has revealed structural imbalances in some key euro-area export sectors, most importantly the transport sector. The future of euro-area exporters thus depends on how companies will adjust to these developments.
In a separate section, the report also explores in more depth how non-price factors such as innovation and the business environment influence export growth. The econometric results show that innovative economies with favourable conditions for doing business export more. Therefore, by creating favourable conditions for entrepreneurship and innovation in domestic economies policy-makers can help euro-area companies to take advantage of the ongoing rapid recovery in world trade.
Better understanding the causes and the mechanics of the recent financial and economic crisis remains an important topic which is also addressed in this issue of the QREA. On the basis of the latest version of the Commission's QUEST model, the report assesses quantitatively the relative importance of various factors in explaining the recession in the euro area. According to the analysis a strong fall in productivity and a decline in investment were the primary factors behind the drop in euro-area GDP. The recession was exacerbated by the slump in world trade. At the same time, other factors that attracted a lot of attention during the crisis, such as the bursting of the housing bubble and the tightening of credit conditions for households do not appear to have been central driving forces of economic decline in the euro area.
Another crisis-related topic analysed in the report is the impact of the crisis on business cycle differences within the euro area. While the economies of the Member States have moved closely in tandem since the launch of the euro (i.e. their cyclical peaks and troughs have remained closely aligned), some Member States benefited from a comparatively stronger cyclical expansion in the few years preceding the crisis (IE, EL, ES and FI). This can mostly be ascribed to strong credit cycles (IE, EL, ES) and a high exposure to booming world trade (FI). The phase of cyclical dispersion has recently been followed by renewed convergence as the countries concerned have experienced comparatively stronger recessions due to the need to consolidate overstretched balance sheets. The convergence may, however, be only temporary. In economies which are insufficiently flexible, deleveraging processes can be protracted. Renewed cyclical divergence due to a sluggish recovery in some of the countries with strong deleveraging needs can therefore not be excluded in the medium-term.