The Eurozone Faces a Twin Deficit Crisis: Germany and France Experience External Trade Pressure
Recently, the Eurozone economy has been caught in a "pinch", with Germany's exports and France's trade deficit showing signs of weakness, highlighting the simultaneous slowdown in both external and internal demand.
Data released by the German Federal Statistical Office on July 9 showed a 1.4% month-over-month decline in German exports in May, significantly exceeding the market's expectation of a 0.2% decrease. Exports to the United States were particularly lackluster, with a 7.7% month-over-month drop, reducing the export value to 12.1 billion euros (approximately 14.17 billion dollars), the lowest since March 2022. Regionally, Germany's exports to EU countries dropped by 2.2%, while exports to non-EU countries fell by 0.3%. Although the trade surplus in May rose to 18.4 billion euros (about 21.6 billion dollars), higher than April's 15.7 billion euros, the decline in exports has sparked concerns over the weakening of the Eurozone's economic engine. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, pointed out that the recovery of external markets is key for German exporters to regain growth momentum.
Meanwhile, France's trade figures for May are equally concerning. Official data shows that France's trade deficit in May slightly improved to -7.766 billion euros, better than the expected -8.25 billion euros, but it remains high. Imports stood at 56.654 billion euros, and exports at 48.888 billion euros, with a slight adjustment in import and export volumes from the previous month, indicating weak internal and external demand.
EU-US Trade Negotiations Enter the Final Stretch: Tariff Bargaining Intensifies
As the Eurozone economy faces pressure, EU-US trade negotiations have reached a critical phase. On July 7, the US announced a delay in reinstating "reciprocal tariffs" set to restart on July 9, postponing them to August 1, allowing a brief window for negotiations. Failure to reach an agreement could see EU export goods tariffs soar to 50%, with potential US tariffs on pharmaceutical, semiconductor, and other industries also looming.
Currently, negotiations are centered on a 10% baseline tariff rate, and the EU is working to secure exemptions for key sectors such as aircraft, medical equipment, and spirits. Insiders revealed that the negotiations involve a "offset mechanism," potentially allowing EU carmakers manufacturing in the US to export tariff-free, a move favorable for German auto manufacturers but sparking concerns about European industrial relocation. Differences within the EU are apparent: some member states advocate for quick resolutions to avoid uncertainty, while others insist on countermeasures to strengthen leverage. The EU has approved tariffs on 21 billion euros of US goods and prepared a countermeasure list worth 95 billion euros, covering Boeing aircraft, automobiles, and other products.
Data indicates that the total trade in goods and services between the EU and the US will reach 1.7 trillion euros in 2024, with the US being the EU's largest export market. Trump has repeatedly confronted the EU over its 198 billion euros goods trade surplus, while the EU emphasizes the US surplus in service trade, highlighting the complex economic and trade interests at play.
ECB's Policy Stance: Support for Quantitative Easing
With economic pressures mounting, the European Central Bank's monetary policy stance is under scrutiny. ECB Governing Council member and Governor of the Bank of France, Francois Villeroy de Galhau, recently expressed support for using quantitative easing (QE) as a preferred tool among unconventional policies. He believes that with interest rates near zero, QE can bring "lasting changes," and its negative impacts can be managed through reasonable measures, making it more advantageous than negative interest rates.
However, there are divisions within the ECB. Executive Board member Isabel Schnabel argues that the "cost-effectiveness ratio" of QE is no longer ideal, favoring long-term refinancing operations instead. But Villeroy stressed that the current strategic review clarifies the "moderate use" principle of QE, providing policy space to tackle economic challenges.
Currently, the global market is focused on the Federal Reserve's June monetary policy meeting minutes (to be released on July 10), which may further influence the euro's trajectory and the Eurozone's economic response space.
