When asked about the health of the euro area at his press conference earlier today, Mario Draghi trotted out an old canard often used by his predecessor as European Central Bank President, Jean-Claude Trichet. He said that while it was easy to talk down the euro’s prospects, the fact remains that unlike the UK, US or many other economies around the world, the euro area doesn’t have that much of a current account imbalance at all.
Technically speaking, this is quite right. Here is the euro area’s current account over recent years:
Of course Britain and America would kill for a current account as balanced as this – it would mean we would no longer be as reliant on other countries to buy our debt and sell us their goods as we are at the moment.
But the problem with Draghi’s claim is that it misses the point. The euro crisis has not been about the relationship between the euro area and the rest of the world – it’s been about the relationship between those euro member states themselves. It’s been about the current account deficits and surpluses between different euro members and the consequent build-up of debts and credits which have left some countries (Greece, Spain etc) without access to capital markets and other countries (eg Germany) with a bill.
So how does the euro area’s current account balance look if one does it at a country-by-country layer? Here’s how:
Yep. Rather less balanced, and considerably more chaotic. When investors from around the world look at the euro and consider it’s in crisis it’s this second graph they occupy themselves with – since the euro area is not, at the moment at least, a single economic and fiscal union: it still consists of individual countries with their own treasuries. And as long as that is the case, the disparity between those wildly oscillating lines in the second chart will be what matters – not the serene, flat chart you get when you step back and look at the euro area as a whole.
After all, when you step back far enough, the entire world’s current account is completely balanced – after all, it’s not as if we do much trade with Mars*. The real issue in sovereign debt crises is the relation between different countries.
* Well, actually, the IMF’s figures suggest otherwise – that there was a current account surplus across the world of $373bn last year. Though this is generally assumed to be a statistical error.