The objective of the report is to analyse the persistently large current account surpluses in a number of EU countries, and to assess whether these surpluses may be damaging.
On 18 December the European Commission presented a report on current account surpluses. The report explores in particular whether the large surpluses in several EU Member States have been optimal from their own perspective, whether there is a link between surpluses and deficits in the euro area and whether there is a sustainable rebalancing on the way.
The report focuses on six euro area Member States: Austria, Belgium, Germany, Finland, the Netherlands and Luxembourg; and two non-euro area countries: Sweden and Denmark. All have had relatively large current account surpluses over the past decade. However, it should be noted that there is a substantial heterogeneity among the eight countries.
Deficits and surpluses in the euro area (and the EU) are closely connected due to intensive cross-border trade and financial links. In particular, the excessive savings of the surplus countries financed deficits in other euro area countries. However, the report underlines that it is not possible to establish a causality between deficits and surpluses in any pair of countries. For example, there is no evidence that the strong export performance of the surplus countries significantly crowded out the exports of the deficit countries.
The report also stresses that current account surpluses or deficits may, or not, constitute macroeconomic imbalances. Deficits and surpluses are a natural consequence of economic interactions between countries. They show to which extent a country relies on borrowing from the rest of the world or how much of its resources it lends abroad.
However, some of the increase in current account surpluses and deficits reflects distortions due to inappropriate expectations, mispricing of risks, market distortions or is induced by misguided policy interventions or weaknesses in the regulation of financial intermediaries. These market or policy failures imply a misallocation of resources and a build-up of imbalances and vulnerabilities in both surplus and deficit countries. Although many of the damaging consequences of large current account deficits do not apply to surpluses, excessive surpluses can be harmful as well and it would be in the self-interest of the surplus countries to reduce their surpluses, by removing the obstacles hampering their domestic demand.
It is worth noting that the rebalancing inside the euro area and the EU is on-going and, in particular, the trade imbalances between surplus and deficit countries in the euro area have declined considerably. So far, most adjustment has taken place on the side of the deficit countries through compression in consumption and investment, though the improvements in their competitiveness have also played a role. There has also been a reduction in surpluses, but it has been relatively modest until now. However, favourable conditions for stronger domestic demand are in place in most surplus countries.