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Southern Europe: the improvement in current accounts is here to last


Italy, Spain, Portugal, and Greece, which had run external deficits prior to the crises of recent years, now have current accounts at equilibrium or surplus. Part of that adjustment is cyclical in nature, related to recessions. 

However, in Spain and Portugal, the strong growth in exports is also a response to true structural reforms, even though the policies carried out in Italy and Greece have not (or not yet) borne fruit. Moreover, imports should not recover as quickly as they fell with the recession as estimates of potential GDP and growth have been revised down and output gaps are not very large. Current account adjustments are therefore mostly structural, and these countries should not return to large deficits in the near future. However, Spain, Portugal and Greece (but not Italy) will still have substantial external debt, a persistent source of vulnerability.






The peripheral countries have regained neutral or positive current account balances 

During the first decade of the euro's existence, divergences among eurozone member states in terms of current account balances, which were already substantial in 1999, increased. The crisis years that followed resulted in very rapid adjustments. As shown in Graph 1, the so-called "peripheral" countries in Southern Europe (Italy, Spain, Portugal, and Greece1), which were in sometimes very significant deficit positions in 2008, have returned to equilibrium or surplus. Since the large countries that were running high surpluses before the crisis (specifically Germany and the Netherlands) had no adjustment in the other direction, the surplus for the eurozone as a whole, which was low in 2008, increased significantly to about 3.6% of GDP in 2015 (although it was also helped that year by the decline in oil prices). France remains the only large Member State with a deficit, though a very moderate one.

Part of this adjustment is due to the recession

Part of the adjustment of the peripheral countries' current accounts is due to "recession surpluses". In fact, these countries' imports fell during the crisis
years, but overall they fell as much or only scarcely more than their GDP (exception Greece's case). Therefore, the fall in imports contributed a great deal to the nominal adjustment, but without radically altering the import/GDP ratio (Graph 2). Conversely, exports did not fall in the same way, partly because the GDP (and therefore imports) of these countries' trading partners held up better on average. As a result, the export/GDP ratios of peripheral countries have risen significantly and it is therefore exports that appear to be the top contributor to the adjustment once the diminution of those economies' sizes during the crisis have been taken into account.

However, cyclical factors are not enough to explain large divergences in export performances

In the case of Spain and Portugal, growth in exports compared to GDP has gone well beyond what can be explained just by these cyclical effects. In fact, between 2008 and 2015 it was clearly higher than the average growth in Eurozone countries' exports (weighted by the GDP of each Member State, see Graph 3)2. Conversely, though Italian exports gained in volume, they increased substantially less than the Eurozone’s average. Finally, Greek exports contracted in volume. These differences in performance are to be compared with the trends in these countries in terms of cost competitiveness.

Export trends are correlated with changes in price competitiveness, except for Greece Since 2008, as shown in Graph 4, Portugal and Spain have undergone internal devaluations reflected in the decline of their unit labour costs (ULC: the cost, in labour, of producing one unit of GDP). These trends, which result from wage moderation and gains in productivity, were caused by the recession, but also by the significant reforms in the labour market carried out by those two countries in response to the crisis. The details of the components of this fall in ULCs shows

A notable difference between the two countries, as the main contribution came from productivity gains in the case of Spain, at the price of a very large rise in unemployment (hourly productivity increased nearly +12% from 2008 to 2015, vs less than 6% in Portugal) while in Portugal wage moderation played a bigger role (hourly wages increased by roughly +2% over the period, vs roughly +8% in Spain. Yet beyond these differences, it would be hard not to attribute a large portion of their exports' outperformance to these factors. Conversely, the lack of gains in Italy's cost competitiveness, despite the recession, and the continuous rise in its export prices compared to those of other Eurozone members were very likely major explanations for its poor performance in export volumes. While Italy has indeed reformed its labour market, the reform came later (2014) than Spain’s and Portugal’s, and it may not have had enough time yet to produce all its effects on price competitiveness.

Greece seems to be a paradox, because the improvement in ULCs has not kept exports from sagging. This trend may be explained by microeconomic factors (product positioning) and political factors (repeated political crises). In Greece’s case, we must also note that the improvement in cost competitiveness is more recent than Spain’s and Portugal’s, and that the country could benefit from its effects after a delay. This possibility that a large part of the current-account adjustment is due to an improvement in competitiveness, which is itself tied to structural changes (reforms) in Portugal and Spain, means that it could persist beyond the cyclical effects in those two countries. In Italy and Greece, however, it is not yet confirmed that there will be this improvement in exports (though it cannot be ruled out, because its determinants might exist without having had the time to make an impact yet).

The reduction in imports probably also has a structural component

As for imports, it is also likely that their decline, even though it did coincide with the recession, includes a strong structural component, itself linked to weak GDP catch-up prospects. Indeed, the ability of mere cyclical effects to lead to a more vigorous rebound in imports than in exports during the recovery phase (thereby worsening the current account once again), depends above all on the differences in output gap between these countries and the countries to which they export. If we go by the European Commission's assessments, these relative output gaps would be much smaller than estimated a few years ago, since the potential GDP level and growth of the Eurozone's peripheral countries have been revised sharply downward, as the exaggerated optimism of past estimates (fed by the effects of the credit and real estate bubbles) has made itself abundantly clear. This means that the four countries in question, after their GDP dropped more than that of the countries receiving their exports, might not fully make up for this underperformance. The future deterioration of their trade balances due to simple cyclical effects will be limited accordingly (paradoxically, then, for a "bad" reason). Ideed, calculations made by the European Commission led to the conclusion in 2015 that the purely cyclical component of the current-account adjustments in recent years was marginal, much like the current existence of slight structural surpluses in Italy, Spain, and Portugal (but not Greece, where the very large structural deficit has nonetheless been greatly reduced). See Graph 6. Therefore, while we cannot rule out that the economic recovery could temporarily send the current accounts of Southern European countries into slightly negative territory again (a scenario whose probability would also be reinforced should oil prices recover further), it does seem very unlikely that there will be a return to the very high current deficits of the previous decade.

Excessive external debt will remain a vulnerability

This lasting external adjustment will at least stabilise these countries' net external debts, which have become very large over the years (but much more reasonable in Italy's case). Reducing them quickly would require further positive developments in terms of exports, which are unlikely in the near term (at least for Spain and Portugal, in view of the progress already made). In theory, assistance could come from adjustments made in the other direction by Eurozone countries running historical surpluses, if they implement policies aimed at stimulating their domestic demand. However, while the current trends toward higher wages in these countries are not enough for a comprehensive Eurozone-wide rebalancing, such assistance would require major fiscal expansion plans in surplus countries that seem unlikely with the current political balances of power (although plans for major tax cuts in Germany could be seen as a step in this direction). 

In conclusion, progress that is both massive and sustainable (the transition from large current deficits to surpluses) has been achieved on flows. On the other hand, the massive backlog of external debt resulting from the obsolete growth models of the previous decade is so large that it will long remain a vulnerability, at least for Spain, Portugal, and Greece (but much less so for Italy). Without necessarily holding back the recovery, this debt will remain a major vulnerability that could heighten investor distrust should there be another crisis, and prolong or increase these countries' dependency on the Eurozone's internal solidarity mechanisms.











1 We are not considering the situation of Ireland here, due to its economy's substantial openness to international trade, nor that of Cyprus, whose economy is much smaller in size.

2 Generally speaking, both of these countries' exports do not seem to be to countries where growth, on average, is much stronger than that of the countries receiving "average" exports from the eurozone. For both of these countries, France, whose growth was not especially strong during the 2008-2015 period, stands out as a particularly important market, while Spain and Portugal have significant trade with each other.

Strong Spanish and
Portuguese exports are largely
the result of substantial efforts
to improve competitiveness




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Tristan PERRIER, CFA, Strategy and Economic Research at Amundi
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Southern Europe: the improvement in current accounts is here to last
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