France, Germany, Italy, and Spain: Explaining Differences in External Sector Performance Among Large Euro Area Countries

Abstract: During 2001–04, the performance of the external sector differed markedly among the four largest euro area countries. This study describes the evolution of the traditional determinants of exports and imports - domestic and foreign demand and cost and price competitiveness - and econometrically assesses their contributions to the evolution of trade volumes during this period. While it is found that these factors go a long way in explaining differences across countries, considerable unexplained residuals remain, indicating that, barring data problems, other factors, unobservable or omitted, also played an important role during 2001–04. Several stylised facts stand out. Imports were well explained by the import content of domestic and foreign demand, while competitiveness played only a secondary role. For exports, all countries benefited from rising global demand, with Spain profiting the most and France the least. Similarly, all countries endured real exchange rate appreciation, with Italy suffering the most and Germany the least. Interestingly, the unexplained part of exports was positive for Germany—thus exports behaved stronger than expected—and negative for the other three countries.