Trade Linkages, Balance Sheets, and Spillovers: The Germany-Central European Supply Chain

IMF Working Papers, October 14, 2013

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Germany and the Czech Republic, Hungary, Poland, and Slovakia (the CE4) have been in a process of deepening economic integration which has lead to the development of a dynamic supply chain within Europe—the Germany-Central European Supply Chain (GCESC).
Model-based simulations suggest two key policy implications:
- First, as a reflection of strengthening trade linkages, German fiscal spillovers to the CE4 and more broadly to the rest of the euro area, have increased over time, but are still relatively small.
- Second, increased trade openness in both Germany and the CE4 implies a greater exposure of the GCESC to global shocks.
The supply chain nature of trade integration implies that final demand in Germany is not necessarily the main determinant of CE4 exports to Germany.
Owing to its strong fundamentals—including sound balance sheets and its safe haven status—Germany plays the role of a regional anchor of stability by better absorbing shocks from other trading partners instead of amplifying their transmission across the GCESC.

Recognize that strengthening trade linkages raise fiscal spillovers from Germany to the CE4 and the rest of the euro area, although those spillovers remain relatively small.
Account for greater exposure of the GCESC to global shocks as trade openness increases in both Germany and the CE4.
Leverage Germany’s role as a regional anchor of stability—rooted in sound balance sheets and safe haven status—to mitigate amplification of external shocks across the GCESC.
Consider the supply chain structure when designing fiscal and trade-related policies, given that CE4 exports to Germany are not determined solely by German final demand.

Subjects: Exports, Financial sector policy and analysis, Financial statements, Fiscal policy, Fiscal stimulus, International trade, Public debt, Public financial management (PFM), Spillovers
Keywords: aggregate demand, aggregate demand demand shock, Asia and Pacific, balance sheets, CE4, Czech Republic, demand shock, DSGE models, Exports, exports to Germany, financial accelerator, Financial statements, fiscal policy, Fiscal stimulus, Germany, Global, Hungary, Poland, safe haven status, Slovakia, spillovers, supply chain, trade, trade channel, trade linkage, trade matrix, trade openness, vertical integration, vertical specialization, WP