Network analysis and Eurozone trade imbalances

TL;DR

This paper models Eurozone trade flows as a weighted network from 1995 to 2019, revealing increasing trade asymmetries and German dominance, which the common currency has failed to mitigate, suggesting policy adjustments.

Contribution

It introduces a novel network analysis methodology to study Eurozone trade flows, highlighting the rise of trade polarization and German dominance over time.

Findings

German trade surpluses have increased at the expense of other member states.

Trade asymmetry within the Eurozone has grown despite the common currency.

Network analysis reveals a polarization phenomenon related to German dominance.

Abstract

European Monetary Union continues to be characterised by significant macroeconomic imbalances. Germany has shown increasing current account surpluses at the expense of the other member states (especially the European periphery). Since the creation of a single currency has implied the impossibility of implementing competitive devaluations, trade imbalances within a monetary union can be considered unfair behaviour. We have modelled Eurozone trade flows in goods through a weighted network from 1995 to 2019. To the best of our knowledge, this is the first work that applies this methodology to this kind of data. Network analysis has allowed us to estimate a series of important centrality measures. A polarisation phenomenon emerges in relation to the growth of German dominance. The common currency has then not been capable to remove trade asymmetry, increasing the distance between surplus and deficit countries. This situation should be addressed with expansionary policies on the demand side at national and supranational level.