18/5/18: Euro area current accounts 1980-2017

What happened to the Euro area current accounts since the introduction of the Euro?

Periodically, I update my charts on the Euro effects on the external balances of the EA-12, the original economies of the Euro area. Here are the updates:

Considering first cumulated current account balances over 1980-2017 period, the chart below aggregates the EA12 into two sub-groups:

• The 'periphery' defined as a group composed of Italy, Greece, Spain and Portugal
• The 'core' group composed of the remaining EA12 countries

The chart shows several interesting facts

1. Current account deficits in the 'peripheral' states predate the introduction of the Euro
2. Since the introduction of the Euro through 2013 there was a consistent increase in the current account deficits amongst the 'periphery' states, with acceleration in deficits staring exactly at the point of the introduction of the Euro
3. Current account deficits in the Euro area 'peripheral' states were rapidly accelerating into 2009
4. Since 2014, current account deficits in the 'peripheral' states have been drawn down, at a moderate rate, as consistent with the internal deleveraging of these economies
5. Meanwhile, the introduction of the Euro accelerated accumulation of current account surpluses within the 'core' group of EA12
6. The rate of current account surpluses acceleration increased dramatically around 2004 and then again starting with 2009

In terms of external balances, the creation of the Euro area clearly resulted in compounding pre-Euro era existent structural imbalances in the EA12 economies.

Meanwhile, there is no discernible impact of the Euro on supporting growth in trade within the Euro area (here, we use changing countries composition of the Eurozone):

  As per above chart:

• From 2000 and prior to 2014, Eurozone performance in terms of growth rates in exports of goods and services largely underperformed other advanced economies (ex-G7) and was in line with G7 performance
• Before 2000, Eurozone was broadly in line with both the G7 and other advanced economies in terms of growth rates in exports of goods and services
• Lastly, starting with 2014, the Euro area has been outperforming both the G7 and other advanced economies in terms of growth in exports of goods and services - a development that is more consistent with the fallout from the twin Global Financial Crisis (2007-2009) and the Euro Area Sovereign Debt Crisis (2011-2013), as the process of internal devaluation forced a number of Eurozone countries into more aggressive exporting

On the net, there remains no current account-linked evidence to support an argument that the creation of the Euro has been a net positive for the Eurozone member states in terms of improving their external balances and exports flows. On the other hand, there is little evidence that the Euro has hindered trade flows growth rates, whilst there is strong evidence to claim that the Euro has exacerbated current account imbalances between the 'core' and the 'periphery' states.