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Analysis
Britain shows you can increase euro area trade without a single currency

Britain shows you can increase euro area trade without a single currency

EMU may be helpful for trade – but it can also be counter-productive

by David Marsh

Mon 30 Apr 2012

The British economy has fallen back into recession, with latest news of a 0.2% GDP dip in the first quarter.

Despite this, the pound’s holding up surprisingly well against both the dollar and the euro. One background reason may be that, in a difficult global environment, Britain’s trade with its largest customers in continental Europe is performing relatively well.

According to European trade data, the UK last year remained the main trading partner (merchandise imports plus exports) of the 17 member countries of economic and monetary union (EMU), ahead of the US and China. In trade with Europe’s largest economy, Germany, the British are - again, followed by China and the US, but behind France and the Netherlands - foreign trade partners No. 3. Not a bad score.

As everyone in Europe knows, German industry is looking for customers on a global level. German companies are integrating economically not with EMU countries but with fast-growing emerging markets. Europe’s most intensive trade relations are still, however, within Europe. And here, the UK - in spite of non-membership of EMU - has a strong place.

In 2011, the UK increased exports to the 17 EMU members by 12% to €166bn, while China boosted sales to the euro bloc by 4% (to €217bn). Overall euro area foreign trade volume with the British weighed in at €379bn, well ahead of the US with €337bn, and China with €332bn.

The UK’s prowess in trade with Germany was also striking. British exports to Germany increased 27% in 2011, imports rose 16%.

German-British foreign trade volume last year was €147bn - €84bn in German exports, imports €63bn - compared with France (€169bn), the Netherlands (€159bn), China (€141bn), and the US (€125bn). Since EMU’s birth in 1999, trade between Germany and Britain developed far more dynamically than with Berlin’s main partner country, France. British exports to Germany increased 122% between 1998 and 2011, while imports increased 104%. French exports to Germany grew 52%, imports rose 88%.

There are many reasons for the surprising dynamism of UK-German trade. Good communications and transport links, and the English language skills of many German business people, are just part of the story. Personal/social links, from education to tourism, play a role too, as does the impact of the City of London. A key factor is the sheer weight of corporate and portfolio investment between the two countries, in varied sectors of the “real economy” ranging from manufacturing to logistics, energy, telecommunications and media. All this works through to the trade figures too.

One important reason for EMU was to promote trade. The British record since 1999 demonstrates that a single currency may be helpful, but it is not necessary to generate cross-border exchanges.

Economic decline in EMU’s peripheral countries underlines how monetary union can turn counterproductive.

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