As for the entire Eurozone, its trade surplus in goods and services remains near record highs, but it is not increasing further, so it is no longer supportive of GDP growth. Furthermore, exports and imports have decelerated to near 0% YoY, indicating a major shift in the trend. The current account remains very high, but it will likely start declining as Europe’s competitiveness is decreasing and as some of its primary export markets, particularly China and Russia, are decelerating.

Eurozone Current Account in EUR BB
Not seasonally adjusted

Eurozone Current Account in EUR BB

Source: Bloomberg, seasonally adjusted


The major post-2011 uptrend in the GIIPS’s external balances was a primary factor in the Eurozone’s ability to remain intact. Not only did the improvement increase confidence in financial markets, it prevented a huge depression in the periphery.

This positive trend is now fading for parts of the periphery (although Italy and Ireland deserve commendation) and although major external deficits are long past, markets will be watching carefully if deficits start to grow. If they do, bond yields, which have declined to extremely low levels in most of the periphery, would likely sharply revert to higher levels for Portugal, Spain and Greece. This would decrease confidence in other Eurozone countries and likely affect global risk sentiment overall, especially among hedge funds investing into peripheral debt in a leveraged “convergence trade” that has similarities to the Long Term Capital Management tumult in the late 1990s.

Thus, we will report on this trend more actively once again in the coming quarters. The recent upheaval in the Portuguese financial sector also bears close scrutiny, although for now, it appears manageable.