Home > Uncategorized > The runaway Eurozone current account surplus

The runaway Eurozone current account surplus

Restraining domestic demand is the policy of choice of the Eurozone. Less domestic demand leads, naturally, to less imports and an increasing surplus (or declining deficit) of the current account. Macr0 101. Which is what happened in the Eurozone. Yes, macro-economics does have some predictive power. Restraining domestic demand in Europe does via the import channel however not only lead to high unemployment and lower incomes in the Eurozone but also to lower income and less production abroad. I can’t imagine that countries like the USA, China or the UK will keep accepting this. Note: it’s not about the level of the surplus (though this is starting to become worryingly high, too, for an economy as large as the Eurozone) but about the considering the size of the Eurozone very fast increase. Imagine what whould have happened when the UK and the USA had pursued comparable policies.


Source: ECB

  1. PZ
    March 10, 2014 at 4:45 pm

    For every transtaction there are two parties. Accounting identities hold:


    Broadly defined capital account balance + current account balance = 0.

    In order to there to be current account surplus there have to be capital account deficit. In fact, I would argue that this “capital flight” has CAUSED the current account surplus, not any budgetary policies, just because accounting identities hold always.

    So the real question becomes what has caused this capital outflow to happen, what is it’s internal structure?

  2. PZ
    March 10, 2014 at 4:52 pm

    There is just unbelievably little knowledge about accounting identities among modern day economists, even though they should be at the heart of the economics education.

    There is some explanation about balance of payments identity on BOP wikipedia page: http://en.wikipedia.org/wiki/Balance_of_payments

    Then there are some important identities on sectoral financial balances: http://en.wikipedia.org/wiki/Sectoral_balances

    Every economist should know these.

  3. PZ
    March 10, 2014 at 5:10 pm

    There are some disparancies because of errors and omissions. Otherwise these data series match pretty well up:


  4. PZ
    March 12, 2014 at 5:12 pm

    Japan good case experiment in this. It has cut wages for last 20 years, you can see it from the world bank statistics. Other countries had inflation so their competitiveness should have gone trough the roof. But have they achieved larger current account surpluses?

    Answer is no. CA surplus has stayed at the same levels while yen has appreciated. CA balance is dominated by what happens in the broadly defined capital account.

  5. March 13, 2014 at 11:51 pm
  6. Johannes
    August 31, 2015 at 2:18 pm

    @PZ While I agree that Economists should acknowledge accounting identities more often, I disagree with your conclusion. In particular your second accounting identity suggests, that the external balance should go in the “positive” direction, if government spending goes down… Unless you honestly believe that the private sector would pick-up the slack…

    As for the case of Japan, I do not really get your point, why inflation should increase competitiveness. Doesn’t this largely depend on the reaction of the exchange rate?
    Also I would argue from the opposite perspective… If wages are cut, not only do you get more competitive, it is also possible to decrease total wages and thus decreasing import demand.

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