Wednesday, 18 April 2012

ECB Loses 86% of the Eurozone's Current Account Deficit

What is one to think about the Eurozone's revision of absolutely fundamental data which evaporates 86% of the zone's current account deficit for the last two years? That is what has the European Central Bank has unveiled today, revising down the 2010 deficit from Eu42.16bn to Eu6.79bn, and the 2011 deficit from Eu29.49bn to Eu 3.21bn.

Although these are some of the biggest revisions of major macro-numbers I've seen for a while, they are curiously inconsequential, because what ails the Eurozone is nothing to do with cashflows, and everything to do with balance sheets. Probably the most serious medium term consequence is on the credibility of the institution itself - it is, after all, meant to making policy at least partly on its seemingly unstable  monitoring of the Eurozone economy.

What is the basis of the revisions, and what do they do to our understanding of the underlying cashflows of the region? At the moment, the ECB says simply that the huge 2010-11 revisions are 'mainly owing to revisions for income on direct investment'. The ECB's notes strongly imply that these revisions are related to revisions for the Eurozone's net direct investment position generally. Those revisions led to the ECB cutting its statement of the Eurozone net foreign direct investment liability position, by Eu 69bn to Eu 1,224bn as of 3Q11. But that's far too small a shift in the underlying capital position to produce such a dramatic improvement in the Eurozone's current account cashflows.

For now, the exact justification for the revisions remains mysterious. What it means, however, is that in 2010 official data now shows the Eurozone with a current account deficit of 0.3% of GDP, rather than 1.8% of GDP. In 2011, it had virtually no deficit at all (0.1% of GDP) rather than the 1.3% deficit previously recorded. Europe's savings and investment are now virtually balanced, apparently. Moreover, the private sector savings surpluses must correspondingly have been better than previously thought (around 5.8% in 2010 and falling to around 4.1% by 3Q11).

Fundamentally, it doesn't contradict what we already know: that the Eurozone private sector is generating substantial savings surpluses, which are fetching up as positive cashflows into its banking system. Those cashflows (deposits in minus loans out) amounted to Eu218bn in the 12m to February, and cut private sector net debt to Eurozone banks to Eu 376bn. All that cash inflow, and more, has been used by Eurozone banks to buy foreign assets: in the 12m to February, Eurozone banks' net foreign assets rose Eu262bn to Eu934bn.

In other words, every measure concurs: the crisis of the Eurozone is generating substantial net outflows of capital from the region. So here's a final note from the ECB's data-release: at the end of 2011, gross external debts of the region amounted to Eu11.3tr, or about 121% of GDP. Those debts had fallen Eu126bn in the last three months of the year.

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