Latest / The European Economy Podcast with Fexingo: ECB, Eurozone, and Continental Markets / Europe's Hidden Export Strength in Services
Transcript
- Lucas: So, we talk a lot about eurozone exports — cars, machinery, chemicals. But there's a quieter engine that's been picking up pace, and it might surprise you. I'm talking about services exports. Luna: Services? Like tourism and consulting? That sort of thing? Lucas: Exactly. But modern services go way beyond that — software, engineering consultancies, financial services, even medical research. And the numbers are striking. Since 2020, eurozone services exports have grown at a compound annual growth rate of over 6 percent. That's faster than goods. Luna: Six percent is decent. But what's driving it? I'd have thought goods still dominate. Lucas: They do — in absolute terms, goods are still the bulk of exports. But services are closing the gap. A recent ECB working paper highlighted that the eurozone now runs a services trade surplus of over $300 billion annually. That's up from about $200 billion a decade ago. Luna: So what's filling those export orders? I assume it's not just German engineering firms. Lucas: Right, it's a broader mix. France is a big player in engineering and architectural services. Ireland punches way above its weight in software and IT services. And the Netherlands has become a hub for logistics and re-export services, acting as the gateway for goods moving into Europe. Luna: And the euro being around $1.16 — does that help? A weaker currency usually boosts exporters. Lucas: It does help, but here's the twist: services exports are less sensitive to exchange rates than goods. Because they're often tied to local costs and specialized skills, the currency matters less. What matters more is demand and market access. Luna: So even with the dollar easing a bit — the trade-weighted dollar index is down to 118.9 — that doesn't dent the momentum? Lucas: Not really. The dollar has eased slightly, but the euro has been stable, and that's actually fine for services. The bigger issue is non-tariff barriers — regulatory fragmentation across the EU. A service provider in Milan still faces tough licensing rules to sell into Paris or Berlin. Luna: I thought the single market was supposed to fix that. Isn't there a services directive? Lucas: There is, but it's unevenly enforced. The ECB paper points out that services trade within the EU is still about half as integrated as goods trade. Digital red tape, national data rules, different professional qualifications — all of that adds friction. Luna: So the potential is even bigger if they actually removed those barriers. What's the growth outlook then? Lucas: The report suggests that full implementation could add up to 1.2 percent to eurozone GDP over the long run. That's substantial for a region that's been stuck around 1.5 percent annual real GDP growth. Luna: And the recent real GDP growth number was 1.5 percent annualized — down from 2.1 percent. So services could be a bright spot in a slowing economy. Lucas: Exactly. And there's another angle: services exports are less cyclical than goods. When demand dips, people still buy software licenses and consulting hours. That resilience is why the eurozone's trade picture isn't as bad as some headlines suggest. Luna: But are all countries sharing in this? Or is it just the usual suspects like Germany and France? Lucas: Good question. Actually, the smaller economies are doing heavy lifting. Ireland's services exports are about 50 percent of its total exports. The Netherlands is around 35 percent. Germany, by contrast, is much lower — around 20 percent, because its goods sector is so massive. Luna: So it's almost like a diversification story. Countries that are less goods-heavy are finding their niche in services. Lucas: Precisely. And that's why the ECB is paying attention — because services could be a more sustainable growth driver than goods, especially as global demand shifts toward digital and knowledge-based services. Luna: That's a really useful way to think about the eurozone economy. If today's conversation helps you see exports a bit differently, then we're doing our job. And the way we keep these episodes coming without ads is listener support. So if you find value in what we do, consider buying me a coffee at buy me a coffee dot com slash fexingo. It genuinely helps us keep the lights on. Lucas: Yeah, it's a small gesture, but it goes a long way for a niche show like ours. Thanks for that thought. Luna: Anyway, we were talking about barriers. Do you think the EU is actually serious about removing them? Or is this just another paper? Lucas: There's some momentum. The Digital Single Market program is pushing for e-commerce and digital services integration. But progress is slow. The paper suggests that if they just harmonized professional qualifications, services exports could jump by another 15 percent. Luna: Fifteen percent on top of an already growing base? That's significant. So what's the holdup? Lucas: National interests, especially in regulated professions like healthcare and law. Countries resist mutual recognition because they fear losing control over standards. It's a political problem as much as an economic one. Luna: Makes sense. So even with the barriers, the growth is happening — just not as fast as it could. Lucas: Right. And the next big test is digital services. The EU's data governance act is meant to encourage data sharing, but companies are still cautious about cross-border data flows. If that loosens, you could see another surge in services trade. Luna: Given that, should investors be looking at services-oriented stocks more than goods exporters? Lucas: I'd say it's worth paying attention to. A basket like EZU — the MSCI Eurozone ETF — has a decent chunk in financials and technology, both services-heavy. And it's down 1.3 percent over the past week, so there's some volatility, but the structural trend is up. Luna: So the next time someone says 'Europe is all about manufacturing,' you can push back with the services story. Lucas: Exactly. It's not just about selling machines — it's about selling expertise, data, and know-how. And that's a more resilient export base. Luna: Where do you see this going in the next few years? Could services exports eventually match goods exports? Lucas: It's possible, but it'll take time. If the growth keeps up and digital barriers fall, services could approach the size of goods exports within a decade. That would fundamentally change the eurozone's trade profile. Luna: I'll be watching the ECB's next move. Thanks for breaking this down, Lucas. Lucas: Always a pleasure. And if you want to dig deeper, we'll have the report linked on our website.