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Since the early 2000s, the euro area has faced a persistent growth challenge. Output and productivity growth in the region have remained below those of global competitors such as the US and China. Over the same period, the euro area has maintained a sustained trade surplus, averaging 2.6% of GDP. This was accompanied by rising trade openness and a trendless real exchange rate (RER).<\/p>\n
Some interpret the positive euro area trade balance as evidence of deficient domestic demand, particularly weak investment (e.g. Bernanke 2015, Kollmann et al. 2016, 2017, Demertzis 2024, Sandbu 2024, IMF 2025, OECD 2025). Others highlight structural factors such as demographics (Kollmann et al. 2015) as well as strong trade and financial linkages with the rest of the world (Chen et al. 2013). Recently, Draghi (2024) argued that weak Single Market integration and shallow capital markets suppress investment, tilting growth toward external demand and sustaining surpluses.<\/p>\n
Most of the existing long-standing literature on euro imbalances has focused on internal adjustment within the euro area (see, for example, Zeugner and Hobza 2013, Fadinger et al. 2023, and the survey among economists conducted by Reis et al. 2016). Several studies have stressed the role of resource misallocation (Gopinath et al. 2017) and financial market imperfections (Kollmann et al. 2016, Jaccard and Smets 2020, Ozhan 2020) in explaining weak demand in the euro area particularly after the financial and sovereign debt crises.<\/p>\n
In a new study (Ifrim et al. 2025), we revisit these dynamics using an estimated DSGE model that allows for persistent (trend) shocks to productivity and trade structure. By departing from the common assumption of transitory disturbances, this framework quantifies the long-run forces of external adjustment. Our key finding is that the euro area\u2019s persistent productivity growth gap vis-\u00e0-vis the rest of the world (RoW) has been a central driver of the trade surplus. Trade structure shocks \u2013 particularly declining euro area home bias and falling import prices \u2013 also play a critical role by offsetting appreciation pressures on the RER.<\/p>\n
Our findings highlight that Europe\u2019s persistent trade surplus and weak investment are rooted not only in domestic demand conditions but also in long-standing productivity gaps and structural shifts in global trade. Our analysis thus supports recent calls for renewed reform efforts to strengthen productivity and enhance the region\u2019s resilience to global shocks.<\/p>\n