Question

GLOBAL ECONOMICS

1. Explain what the expected impact of the fall in international trade on the
Eurozone economy might be (exports, imports, exchange rates, poverty,
income inequality). Present specific data to support your argument.
2. Why Germany is upset with Spain with respect to how Spain managed trade
surplus and government surplus money? Present specific data to support
your argument.
3. Why most European governments will experience current account deficits?
Which is one of the main policies to reduce the current account deficit? Present
specific data to support your argument.
4. Explain what the Gini Index is and explain how do you expect the Gini Index
to evolve in 2 of the BRICS countries during the next 3 years. Present specific
data to support your argument.

Answer 1

The fall in international trade due to COVID -19 has an impact on the various factors of economic indicators in the EU zone. According to new OECD data, the global trade slowdown is hitting the EU the hardest, as uncertainty over the UK’s exit from the trading bloc and Germany’s industrial downturn add to the disruption caused by US-China trade tensions. Exports from the EU contracted 1.8 % in the third quarter compared with the previous three-month period, while imports fell 0.4 %, according to figures released on Thursday by the Paris-based organization. Exports and imports declined across all major EU economies, with falls of 3.6% and 1.7 % respectively in France and 0.4 % and 1.8 % in Germany. In Italy trade dropped for the sixth straight quarter: exports decreased by 1.2 % and imports slipped 1 %.

This was a more severe contraction than the overall 0.7 % fall in exports across the G20 group of major economies, which account for about 85 % of world output. G20 imports dropped 0.9 % in the same period. Trade-in goods waned in the third quarter in nearly 80 % of the 50 countries and regions tracked by the OECD, while imports fell in the US and across all the major Asian economies, including China. Last week, Laurence Boone, OECD chief economist, warned that high levels of uncertainty on trade policy and geopolitics had resulted in stagnating global trade, dragging down economic activity in almost all major economies. The geographically widespread export contraction also partially reflects lower oil prices and depreciation in other major currencies against the dollar; the OECD reports its trade data in current dollar values.

Poor trade performance is a drag on Europe's growth because many EU economies are relatively open, with a high reliance on trade; in Germany trade is equivalent to 87 %of gross domestic product, compared with 27 % for the US. “European merchandise trade has been impacted significantly by uncertainty surrounding the trade war and Brexit,” said Timme Spakman, an economist at ING. At the same time, “the slowdown of the German industry had an impact on European trade, as German producers ran down inventories rather than importing new intermediates”.
as a reason not to invest. In the UK, exports contracted sharply as a result of Brexit uncertainty and the fall in the value of sterling against the dollar. In response to the slowdown in trade and growth leading central banks have moved in recent months to ease monetary policy, but this has not had an effect yet, the analysts said. “Policy easing in the US, China and the eurozone is not yet feeding through so all remain a drag on trade growth,”

Some of the European countries are running a current account (CA) deficits. this tends to be viewed as negative, though they may not necessarily harmful. Understanding what gives rise to such deficits, however, is key.

A country’s current account balance is usually mentioned in the context of the trade balance and can be the result of an excess, or alternatively, a lack of goods and services that need to be imported; and uncompetitive, undiversified export base; unemployment, down in export, etc. The current account contains two more items: primary income (such as dividends) and secondary income (such as remittances).

The often-observed current account deficits in some EU countries may depend on more than only the trade of goods and services.

First, CA deficits could indicate that a country’s national savings are lower than its investments. For instance, most developing countries lack the necessary capital to finance infrastructure investments. Second, CA deficits could be the result of borrowing and lending decisions to allow for consumption smoothing across generations. Aging economies may save more than investment requires into the domestic economy and may thus seek investment opportunities abroad.

Thus, both borrower and creditor countries could benefit to an extent from the existence of modest current account deficits and surpluses. Here, the long-run sustainability of current account deficits depends not solely on their sheer existence but rather on their underlying determinants and financing sources.

Current account deficits financed by long-term foreign direct investments usually generate returns over time and could raise the productive capacity of an economy. The same rationale applies to the import of capital goods versus consumption goods. Long periods of persistent CA deficits may be unsustainable, especially in the face of economic shocks, when access to foreign financing may decline or disappear. Therefore, investment of any momentary deficits into productive uses – which could eventually result in a CA surplus longer-term – is key.

CA deficits become net foreign liabilities, which have to be paid back in time. country reliant on further foreign capital inflows to finance maturing external liabilities and may lead to vulnerability in the instance of an interruption of global market access.

Overall, the external positions of European Union member states have improved over the past five years, but progress is uneven and reveals a lack of convergence. However, the real effective depreciation in the euro, tight fiscal policy in most member states, and private and public sector debt deleveraging has generally supported improvements in the external positions of euro area countries over this period. data has been taken from www.eurostat.org.