What will Europe do next?

Views From the Marsh - David Owen

Today saw the ECB release its latest detailed breakdown of the euro area’s current account surplus, and its corresponding net capital outflows. It makes very interesting reading, especially with everything going on.

The euro area surplus was put at €426bn (2.8% of euro area GDP) in 2024, after a €243bn surplus (1.7% of GDP) a year earlier. BUT, the largest bilateral current account surpluses were vis-à-vis the UK (€197bn) and Switzerland (€76bn) - perhaps they should also contemplate introducing tariffs? - with the largest deficit vis-à-vis China (€105 bn).

Where is the US in all this?

One thing is clear: the role that the euro area has played in helping finance the very large US deficit - which in turn was partly a product of how QE operated in the Eurosystem, helping recycle the euro area’s large current account surplus into higher yielding US credit (yields in core EU markets were for a long period negative) and into what had been a very strong performing US equity market (even if…