The birth of the European Union and, in particular, the eurozone, has created a common economic market that is unprecedented in the history of Europe — one in which member countries are able to exchange merchandise and services duty free. However, during the current economic and political crisis, some EU nations have realized that trade with their fellow members is not sufficient for them to grow. As a result, they have had to strengthen their presence in other international markets — especially in Asia and the United States.

Spanish companies are just one example. Rafael Pampillón, professor of economics and director of economic analysis at the IE Business School, notes that “Spanish companies have found themselves forced to deal with the collapse of internal demand in their country, and a decline in demand from their EU partners.” That has led to an important change in their mindset. “Now, they are looking to sell in other markets.”

Pampillón adds that Spain is losing its share of export markets in the eurozone, and is gaining market share in other regions, especially in Asia and America. In absolute numbers, the country's sales in those regions are not very significant, but the growth percentages there are very big. “I believe that this is a trend that is going to be maintained over time. Europe will always continue to be our principal market, but other commercial partners will increase their importance a great deal,” he predicts.

In 2012, Spain’s trade deficit dropped by 33.6% to 30.7 billion euros, according to the government. Its exports experienced growth of 3.8%, reaching a total of 222.6 billion euros, the highest number since 1971. Meanwhile, its imports fell by 2.85%, reaching 253.4 billion euros. In addition, its coverage rate (the percentage of its imports that it pays for with its exports) reached 87.86% in 2012, the highest level in its history. Another significant piece of data is that, if the country’s energy deficit were discounted from those numbers, its trade balance would reach a record high surplus of 17.75 billion euros over that entire year. Spain’s sales to the Oceania region (including Australia and New Zealand) grew by 37.6%; its sales to Africa grew by 30.6%, and its sales to Latin America grew by 13.5%.

Despite these good results in its trade balance, Spain’s Gross Domestic Product contracted during 2012 by 1.42%. By the end of last year, the Spanish economy had experienced six consecutive quarters of negative growth.

During the final three months of last year, domestic demand made a negative contribution of 4.7% to Spain’s GDP, while foreign demand for Spanish goods and services made a positive contribution of 2.8%. This data leaves a couple of questions up in the air. Is the improvement in Spain’s foreign trade balance real, or is it the result of the strong fall in imports that stems from the collapse in its domestic demand? Second, is this improvement in Spain’s foreign trade balance sufficient to sustain the country’s economy?

Santiago Carbó-Valverde, professor of economics and finance at the Bangor Business School in Wales, the U.K., and researcher at Funcas (the Spanish Foundation for Savings Institutions), believes that the improvement in the external sector is real. “There have been gains in competitiveness, and Spanish companies have done a very good job of maintaining their export share during this crisis.” In his view, the problem is that “in relative terms, the foreign sector cannot be the sole locomotive of the economy. This would require a lot more companies to add to their exports, and this takes time.”

He notes that it is realistic to believe that exports will ultimately help pull the Spanish economy out of its current economic crisis and become the main source of the country's growth, provided that there is a long-term strategy toward making progress in terms of Spain’s competitiveness abroad. Nevertheless, he insists that this is a very long term process, involving “years and years of commitment to competitiveness and support for exports. It is not at all simple, but it is necessary in the absence of the momentum that other sectors, such as construction, have had in the past.”

Javier Morillas, professor of applied economics at the CEU San Pablo University in Madrid, shares that view. “The behavior of the foreign trade sector is never misleading; it always provides a true test of the progress of the economy by measuring it in the international marketplace, while also indicating the greater or lesser competitiveness of its productive apparatus,” he notes.

Following Spain's Lead

The Spanish case may be more meaningful because Spain’s economy is the fourth largest in the eurozone, following Germany, France and Italy. However, Spain is not unique. The road that Spain has undertaken can be followed by some other European countries, especially those that have been most damaged by the crisis in recent years. On such example is Portugal.

In 2012, Portugal managed to reduce its trade deficit by 35%. According to Portugal’s National Institute of Statistics, the country registered a negative trade balance of 10.67 billion euros. Those figures included trade in goods but not in services. However, in 2010, the country’s deficit was more than twice that number. According to Eurostat, the European Union’s office of statistics, Portugal’s exports of goods and services represented 39% of its GDP in 2012, compared with 28% in 2009. In absolute terms, the EU still absorbs 71% of Portugal’s foreign sales, although its sales to countries outside the European Union have shot up by 20%.

“This is the road for the economies of the eurozone to follow, especially those that have been weakened the most,” notes Pampillón. “The European market is very weak, and companies have to find other markets where they can provide their products and find customers for their services.”

According to Carbo Valverde, all countries aspire to increase their competitiveness in foreign markets, “especially where internal demand is currently structurally weaker.” He notes that export policies depend on sectorial specialization and that within the European Union, this involves jointly making policies in order to avoid the overlapping of certain products and services. “This also requires coordinated policies within each country, such as [those that enable] sufficient flexibility in the labor markets,” he adds.

Along the same lines, Morillas points out that all of the countries in the eurozone are already trying to focus their economies on boosting exports. “They have no other recourse because all of them are heavily indebted — some, such as Italy and Belgium by their own public administrations [governments], and others such as Spain, by their families and their enterprises.”

Pampillón notes that in order for a country to increase its exports, it has to improve its competitiveness. He believes that Spain is achieving this goal, but without having the tools for monetary policy in its own hands. “Spain is taking the road to recovery that it has already taken on other occasions in its history — that is to say, to gain competitiveness with devaluation. In earlier times, Spain devalued the peseta in order to achieve that, but now it cannot do that because we are in the eurozone, and it is the ECB [European Central Bank] that is managing monetary policy.” As a result, he says, the only possible way to do that is through an "internal devaluation" — that is, cutting workers' salaries and production costs as much as possible. “And this is precisely what [Spanish firms] are doing."

Another important way to gain competitiveness and improve exports is to invest in research and development, Pampillón adds. R&D “generates a positive impact on the quality of products and the processes of innovation, while also reducing business costs.” He notes that it is precisely the improvement in productivity generated by technological advancements that increases the capacity to compete. That is because, among other things, it enables production within the country to adapt to changes in international demand.

In this particular regard, Spain has stopped being considered the “example to follow.” As a result of the economic crisis, Spain’s spending on research and development fell in 2011, for the first time since data about R&D began to be recorded in 2001. In 2011, Spain’s spending on investment represented 1.33% of its GDP, compared with the historic record figure of 1.39% recorded in both 2009 and 2010. In the EU as a whole, this sort of spending averages 2% of national GDP. Spain’s figures for 2011 were the latest official numbers published by the INE, Spain’s national institute of statistics. In addition, private investment as a percentage of total Spanish R&D spending is currently only 52%, which is comparatively very low. Among the member countries of the Organisation for Economic Co-operation and Development (OECD), the average figure is 65%, while in countries like Japan, that figure reaches 77%.

A Critical Tool: Monetary Policy

Monetary policy is another factor that must be watched very carefully in those European countries looking to strengthen their exports and jump start their economic revivals, analysts say. However, as Pampillón notes, monetary policy is a tool that they do not manage. The European Central Bank has control over the euro — and many EU governments have voiced concerns about whether the organization, headed by Mario Draghi, is doing enough to help the economies of the region.

Recently, many observers have used the term “currency war” to define the moves that the world’s main central banks have undertaken with the intention of devaluing their currencies in order to gain competitiveness and boost exports. Draghi has considered it an exaggeration to talk about “currency wars,” but it is clear that the euro has strengthened so far this year relative to the world’s main currencies. The euro has appreciated this year by more than 10% compared with the Japanese yen, almost 4% against the Norwegian kroner and the British pound sterling, and about 2% against the U.S. dollar.

However, Carbo Valverde believes that a possible move by the ECB would only have a limited impact. “The euro exchange rate is being maintained in a smaller range — something that is demarcated — although it has suffered significant fluctuations in recent months. That came from rumors about the interest rates that are having the most influence on the exchange rate of the euro. A decline in interest rates can mean a depreciation of the euro versus other currencies, although for a limited period,” he says.

According to Pampillón, “Without doubt, the ECB can lend a hand so that the countries of the euro zone gain further competitiveness in foreign markets.” In his view, they can do that by stimulating exports with the depreciation of the euro. “They should enter the ‘currency war’ that has been set off, just like other countries such as the United States and Japan.”