London Daily

Focus on the big picture.
Friday, Mar 13, 2026

Europe racks up record trade deficit. Can it bounce back?

Europe racks up record trade deficit. Can it bounce back?

It’s not just Europe’s energy balance that has plunged into the red. Its manufacturing trade surplus has nearly halved.

Europe, the world's largest economic bloc, enjoyed stable trade surpluses for a decade but the war in Ukraine and the ensuing energy crisis have tipped the Continent into a spiraling external deficit unseen since the launch of the euro.

The terms-of-trade shock maxed out in August, the latest month for which trade figures are available. And, even though energy prices have since eased, European leaders are still scrambling to shore up supplies of affordable oil and gas to replace lost Russian deliveries. A harsh winter looms.

A breakdown of the trade figures shows that the EU's manufacturing trade surplus has nearly halved this year.

Can Europe bounce back? Or will its industrial base become hollowed out as industry moves offshore? And will the eurozone, and the EU more broadly, end up being saddled with the chronic external deficits that have long plagued the United States and, more recently, destabilized Britain? POLITICO breaks it down for you:

What’s going on?


The eurozone’s negative trade balance with the rest of the world in August stood at €50.9 billion, the highest deficit ever recorded, compared to a €2.8 billion surplus a year ago, according to the latest Eurostat numbers.

The trade deficit for the EU as a whole spiraled to €64.7 billion.

The eurozone’s current account balance — the balance of all trade in goods and services as well as international transfers of capital, such as remittances — hit a €26.32 billion deficit in August, largely driven by the trade deficit in goods, the European Central Bank reported.


Is that a bad thing?


A trade deficit occurs when a country or trading bloc’s imports exceed its exports. A trade surplus is the opposite. Trade deficits are not per se good or bad, although many countries seek a trade surplus, including by setting up tariffs and quotas to artificially boost their trade balance, a practice known as mercantilism.

Is it temporary?


The trade deficit is largely driven by high energy prices, which in August hit a record €350 per megawatt hour. Prices have come down from their peak, trading at around €150/MWh, but they are still a multiple of where they were a year ago.

“Markets have gone from pricing this energy crisis as being temporary, they are now pricing it to be a much longer-term story, albeit not as elevated as it was in August,” said Kristoffer Kjær Lomholt, chief FX analyst at Danske Bank.

“We think that it is a kind of a more long-term thing that is going to weigh on the currencies of economies that are energy importers, where the eurozone, of course, stands out to a very large extent,” he added.

Others believe that the shift, being largely energy related, could resolve itself over time, said Sam Lowe, who covers trade policy at Flint Global.

An EU official also pointed to EU-Russia trade. “The peak in energy prices has made the value of our imports from Russia increase substantially (while the volume of those imports from Russia decreased), and our exports have spiralled down because of sanctions (export controls),” the official said.


Will the EU be less competitive if energy prices remain high?


A negative trade balance and consequently a weaker currency makes imports more expensive. “Net importers will have to pay more for goods and services,” said Lomholt.

On the other hand, a weaker euro could fuel exports, said Matthias Krämer, head of external economic policy at German industry federation BDI. “If the euro currency was a little bit weaker, it could also make Europe’s position on global markets better by making exports cheaper,” he said.

But there’s another way of looking at this. Lowe argued the sustained large eurozone trade surplus was itself problematic, in that it was a function of intra-EU demand being lower than it should be. “Being overly dependent on external demand also leaves the EU quite vulnerable to both external shocks, and political coercion.”

What does that mean for the euro?


“We expect the euro to decline further in coming months as part of this adjustment,” said Robin Brooks, chief economist at the Institute of International Finance.

A negative trade balance or current account deficit puts downward pressure on the value of free-floating currencies, which move with demand of goods: less demand for a country’s exports means less demand for its currency, which in turn lowers its value relative to others. Conversely, strong foreign demand for goods strengthens a country’s currency.

“Foreign investors need to be compensated via a real depreciation of the exchange rate, and generally higher real interest rates,” said Lomholt at Danske Bank.

The Danish lender has recently downgraded its forecast for the € to $ exchange rate to $0.93 in 12 months from virtual parity now, driven in part by the energy price shock. “We have for some time been arguing that €/$ looked overvalued and not undervalued … And just given the additional push to the energy crisis that we got during summer, we saw a case that the euro/dollar [exchange rate] should actually hit even lower,” he said.

Is business freaking out?


A bit.

“The data are not so surprising considering the high energy prices, but they are worrying”, said Luisa Santos, responsible for international relations at BusinessEurope. She called on the EU to try to bring energy prices down and to boost exports by opening new market opportunities via more trade agreements.

Germany, the bloc’s export powerhouse, increased its exports by 14 percent in the first eight months of the year but imports have surged by more than 27 percent, according to national trade figures.

“We’re not performing in a segment which is highly influenced by a cost driven competition,” said Krämer at the German industry federation. “But if this situation will last longer of course some parts of our industry will be more and more under pressure.”

Newsletter

Related Articles

0:00
0:00
Close
Asian Energy Security Tested as Strait of Hormuz Disruption Threatens Oil Supplies
Iran Sets Three Conditions for Ending Regional War as Diplomatic Efforts Intensify
Tesla Secures Approval to Supply Electricity Directly to Homes Across Britain
Prince William Delivers Tribute to Australia’s Naval Alliance Amid Renewed Royal Spotlight on the Country
UK Foreign Secretary Travels to Saudi Arabia to Reinforce Support for Regional Allies
Putin’s ‘Hidden Hand’ May Be Assisting Iran in Conflict With Trump, UK Defence Secretary Warns
UK Sets April Deadline for Tech Platforms to Strengthen Online Protections for Children
Elon Musk Moves Into Britain’s Energy Market as Tesla Wins Licence to Supply Power
UK Watchdog Warns Fuel Retailers Against Profiteering Amid Iran War Price Surge
Report Claims Iran Used UK Charity Network to Expand Influence
United States and United Kingdom Establish Joint Standards for Counter-Drone Technology
Iran May Be Laying Naval Mines in Strait of Hormuz, UK Warns Amid Escalating Gulf Tensions
US Deploys Bunker-Buster Bombs to UK Airbase as Iran Conflict Intensifies
British Troops in Iraq Intercept Iranian Drones Targeting Coalition Base
Release of Mandelson Files Raises Tensions as UK Seeks Stable Relations With Donald Trump
UK Documents Reveal Starmer Was Warned About Mandelson’s Epstein Links Before Ambassador Appointment
Nearly Five Hundred UK Mortgage Deals Withdrawn in Two Days as Market Volatility Forces Lenders to Reprice
Three Cargo Ships Hit Near Iran as Attacks Spread to Strategic Strait of Hormuz
Why British Police Repeatedly Declined to Investigate Jeffrey Epstein’s UK Links
UK Parliament Ends Hereditary Seats in House of Lords, Closing Chapter on Centuries of Aristocratic Lawmaking
EU and UK Urge Israel to Act Against Rising West Bank Settler Violence Amid Regional Tensions
US Senator John Kennedy Says Keir Starmer Should Not Be Trusted for Military Advice Amid Iran War Debate
UK High Court Rejects Attempt to Revive Terrorism Charge Against Kneecap Rapper
Revolut Secures Full UK Banking Licence After Multi-Year Regulatory Wait
Kentucky’s Bench Boost Powers Wildcats Past LSU in SEC Tournament Opener
British Couple Die After Being Pulled From Water at Australian Beach During Family Visit
Global Energy Agency Announces Record Release of 400 Million Barrels to Stabilize Oil Markets Amid Hormuz Disruption
British Airways Suspends UK Repatriation Flights as Middle East Travel Disruption Deepens
US Forces Prepare Ordnance at RAF Fairford as Strategic Bombers Deploy for Middle East Operations
Nigel Farage Faces Criticism After Saying Britain Should Stay Out of Iran War
Landmark UK Trial Begins Over Sony’s PlayStation Store Pricing
UK High Court Rejects Bid to Challenge Britain’s Chagos Islands Agreement With Mauritius
Finnish Duo Triumphs in England’s Annual Wife-Carrying Race, Winning a Barrel of Ale
How U.S. and UK National Security Strategies Are Reshaping the Global Business Landscape
Green Party Gains Momentum as Labour Shifts Toward the Political Centre
Royal Navy Destroyer HMS Dragon Sets Sail for Eastern Mediterranean as Regional Tensions Rise
UK Homebuilder Persimmon Warns Iran Conflict Could Dent Property Buyer Confidence
Roman Abramovich Signals Legal Fight if UK Seeks to Seize Chelsea Sale Funds
UK Ready to Back Emergency Oil Reserve Release as Middle East Conflict Pushes Prices Higher
Study of 40,000 Articles Sparks Debate Over Alleged Anti-Muslim Bias in UK Media
US and UK Army Chiefs Strengthen Cooperation on the Future of Armored Warfare
Britain’s Search for the Next ARM Intensifies as Startups and Investors Target the Semiconductor Frontier
Three US Strategic Bombers Arrive at RAF Fairford as Iran Conflict Intensifies
Cancer Death Rates in the UK Fall to the Lowest Level on Record
UK Government Bond Yields Retreat Slightly After Sharp Spike Triggered by Middle East Conflict
UK Chancellor Warns Middle East War Could Push Inflation Higher
UK Prime Minister Warns Iran Conflict Could Drive Up Prices and Threaten Economic Stability
Trump Declines UK Offer to Deploy Aircraft Carriers to Middle East Amid Iran Conflict
Prince Harry and Meghan Markle to Return to Australia After Seven Years for Philanthropic and Business Engagements
UK Government Signals Independence From Washington as Cooper Says Britain Does Not Agree With Trump on Every Issue
×