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What is the aim of the report on current account surpluses?
The objective of this special analytical report is to analyse the persistently large current account surpluses in a number of Member States. In particular, the report explores 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 in the euro area (and the EU) underway.
Which countries are analysed in the report?
The report focuses on eight EU Member States, 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. The average surplus in these countries, as a group, was about 5 per cent of GDP in 2007. Although there has been some reduction since 2008, surpluses remain relatively high. For 2012, the projections indicate an average surplus of 4 per cent of GDP. However, it should be noted that there is a substantial heterogeneity among the eight countries. For example, since the onset of the crisis, surpluses have declined substantially in Austria, Belgium and Finland (the latter actually moved into a moderate deficit in 2011), but have remained high in Germany, Luxembourg and Sweden, and have even increased in Denmark and the Netherlands. The current account surplus as a share of GDP of the Netherlands is currently the largest in the EU, amounting to 9.2 per cent in 2012 according to the Commission's autumn forecast.
Is there a link between current account surpluses in some countries and deficits in other 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 savings of the surplus countries in excess of their own investment financed the deficits in other euro area countries. However, 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 export performance of the surplus countries crowded out the exports of the deficit countries.
An increase in domestic demand in the euro area surplus economies would improve the trade balance of countries with a deficit. Nevertheless, the impact on the rebalancing of the economic activity in the deficit economies should not be overestimated, because the increase in imports is spread among a large number of trading partners. For example, an increase in domestic demand of a big surplus country, such as Germany, has a much stronger impact on the exports of the neighbouring countries, including those with a surplus, rather than in the ‘peripheral’ economies of the eurozone.
What needs to be done in order to underpin the rebalancing process?
In a monetary union, the adjustment mechanism through relative costs and prices should be supported by sufficiently flexible product and labour markets that allow an efficient reallocation of resources.
Most surplus countries are currently experiencing relatively tight labour markets, so that one could expect a faster market-driven increase in wages in these countries. In a rebalancing context, policies with direct bearing on labour costs should be discussed in a coordinated manner. One has to distinguish between policies that aim at tackling problems with the functioning of the labour market from those that primarily aim to boost competitiveness. However, the rebalancing inside the euro area (and of the EU) can of course not consist of policies which undermine the competitiveness of the EU, of the euro area or even of individual Member States in the global economy, or the objective of price stability.
Moreover, overcoming financial fragmentation and the restoration of sound 'downhill' capital flows from the core towards the vulnerable countries in the euro area will be crucial to promote their recovery, which, in turn, is indispensable to achieve external balance as well as fiscal sustainability. Therefore, a key priority is to restore non-debt capital inflows used for productive purposes, for example in the form of FDI. Appropriate financial supervision, and the implementation of the recent decision on the single supervision mechanism (SSM), are key in this respect to ensure that savings are channelled to productive uses.
Should the euro area as a whole have a balanced current account?
In spite of the current account deficits and surpluses in individual Member States, the current account of the euro area and the EU as a whole has been broadly balanced. But it should be noted that the euro area (or the EU) current account does not need to be balanced. In fact, the structural characteristics of the euro area, including demography and relative level of prosperity, suggest that it could have a moderate surplus. The euro area is not a closed economy and the sum of its surpluses and deficits can substantially differ from zero. According to the Commission's autumn forecast, the current account surplus will amount to 1.1 per cent of GDP in the euro area and to 0.4 per cent in the EU in 2012, after 0.3 per cent and 0.0 per cent in 2011.
VP Rehn speech: Current Account Surpluses in the EU and the 2012 Fiscal Sustainability Report: - Rebalancing for Sustainable Growth