The Blog of Changes - Duncan Freeman

The divisions that fracture the EU run deep. Germany dominates the economic relationship between the EU and China, and this reflects a significant division in Europe. But this division is itself the result of much deeper differences, especially within the Eurozone. The creation of the euro brought with it the illusion of a single economy for the Eurozone. The crisis of 2008 and after has shattered that illusion. The stark internal differences have been laid bare, and made clear the completely different economies and interests of member states such as Germany and the southern European economies.

The differences between member states are not just internal, but also exist in how they interact with the outside world. They show that some parts of Europe are much more part of the global economy than others. The relationship with China is merely one expression of this.

Chart 1: Ratio of Total Trade to GDP (%) 2011 Source: World Bank

Chart 1 shows the size of merchandise trade (imports plus exports) compared to GDP for several EU and also non-EU economies in 2011. The contrasts within the EU are clear. Germany, by a long way the biggest EU economy, has a high ratio of trade to GDP of 75.7% in 2011. Southern European countries by contrast have significantly lower levels of trade. Among the major Eurozone economies both Italy and France have much lower ratios of trade to GDP than Germany at 49.2% and 47.2% in 2011. The troubled economies of southern Europe such as Greece, Spain and Portugal have similarly lower ratios. The figure for Greece in 2011 was only 31.8%. The UK, which is often perceived of as being a trading nation, also has a lower ratio of trade to GDP compared to Germany The Netherlands, has an exceptionally high ratio of trade to GDP at 150.7%, which is to a significant degree a function of the role of Rotterdam as a port.

Germany is a large economy that is highly dependent on trade. Compared to other major developed economies such as the US and Japan with 24.9% and 28.6% in 2011, Germany has a much higher ratio of trade to GDP. It also has a significantly higher ratio than China at 49.8%, which often has been considered, in fact largely incorrectly, to be dependent on trade for its economic growth.

Chart 2: Ratio of Total Trade to GDP (%) 2001-2011 Source: World Bank

The static picture tells us something, but the trends (Chart 2) tell us more. Despite the crisis and the problems in many of its trade partners, especially in the Eurozone, Germany has become more, not less, dependent on trade and remains well ahead of other major EU member states in this respect. So far little of the rebalancing necessary in the Eurozone has occurred.

The dependence of Germany on trade is made clear in the following chart, which shows that at just over 7% in 2012 it has a huge trade surplus as a percentage of GDP. China, which briefly had a higher trade surplus as a percentage of its GDP than Germany, has experienced a significant decline since the crisis in the US and the EU began, and in 2012 is was only 3.9%.

Chart 3: Ratio of Trade Surplus to GDP (%) for Germany and China 2005-2012 Source: World Bank

The German economy has become almost entirely dependent on exports for growth. The globalization of the German economy is much higher than many of its European counterparts. The dependence of Germany on the global economy goes much deeper than its relationship with China, and, rather than decreasing, this dependence is increasing. By contrast, the dependence of China on trade has been reduced significantly, largely because of the economic problems in its major markets. China’s economic adjustment is much further down the road than Germany’s.

These differences in interdependencies show that there is a globalized Europe, and a non-globalized Europe. Germany, with its open, highly trade dependent economy, has benefited from the trading relationships it has, including that with China. This gives it a set of interests which are often at odds with the far less open, non-globalized economies of the EU. Fundamentally different relationship with the global economy creates different interests, especially in their relationships with China, that will continue to divide the EU.

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