EMU Current Account Deficit Widens

The EMU current account deficit widened in May and is fluctuating in a higher deficit zone. Both merchandise exports and imports are accelerating but goods imports are outpacing goods exports in the Zone on all horizons. Services imports recently have surged and over three-month are stronger than services exports by a wide margin. The income accounts are showing increasing net outflows as are current transfer payments.

Despite some well-documented increases in exports of key EMU countries, overall EMU imports are now growing faster than exports. As the euro itself has made a significant rebound from its cycle low there is some loss of competitiveness over that period, but one would expect that with the euro having been so strong for so long the main trend is that the euro is lower and more competitive than it had been than that it has backed tracked from a briefly-visited lower level. Still there is this backing-tracking to deal with in trying to understand monthly current account flows and some economic agents can take of advantage of even brief shifts in exchange rate values.

The increase in the income flow reflects repatriations of profits by foreign firms operating within the zone. As the economy picks up those outflows will increase but there will be offsets from the earnings of EMU-based companies with operations abroad that will repatriate profits to the Zone (even if only in accounting terms). There are also transfers of funds paid out from workers that reside in the Zone but remit payments to those in a domicile outside of the Zone itself. Such payments result in outflows. Then there is tourism. The strength the Euro has kept tourism at bay but as the euro moved lower a European vacation became more attractive to euro-outsiders. That attractiveness is diminished somewhat by the euro's nascent rebound.

A number of factors combine to create the current account position. For Europe the deficit is a mark of some economic improvement in economic conditions within the zone. But over the past year, the net balance of the account is due mostly to one of its relatively minor accounts, net income. Over the last 12 months transfers have totaled 84bln euros balanced by a nearly equal 84bln surplus on trade and services. The net different on the current account has been made by net income flows that have posted 35bln of net outflows over the period leaving the current account in deficit by about 35bln euros.

The goods and services balance has been volatile but the 'net transfers item in the EMU current account has been a relentlessly rising steam of out-payments. Recession has knocked that trend down but new Euro-Area transfer payments seem to on a clear advancing trajectory while the balance which tends toward surplus on goods and services trade has no such offsetting up-trend feature. The balance on the remaining account, the income account, has no clear trend and has differing cycle characteristics than that for net goods and services. Looking at the current account balance and its underlying component trends you can see why Europe wants to export. Its net export and net services revenues, large as they are, mostly offset huge outflows on their transfer account. Its one of the reasons why Germany is not very flexible when pressed by the US over its entrenched exporting, persistent surpluses and weak domestic demand. Much of the income it generates, as is the case for EMU, gets shipped overseas.

Euro-Area Current Account Major components
	Month-to-Month			Period changes
Mlns, euros	May-10	Apr-10	Mar-10	3-Mos	6-Mos	12-Mos
Current Account	-5,800	-5,600	1,500	-1,300	-2,600	-2,900
Goods Balance	3,100	600	3,400	-2,200	-1,700	-900
Services Balance	3,100	4,000	4,500	-500	1,200	700
Income Balance	-4,400	-3,000	-800	-2,900	-300	-3,200
Current transfers	-7,600	-7,200	-5,500	4,300	-1,800	600
Detail- %
Goods	Month-to-Month			At Annual Rates
Exports	5.8%	-1.7%	6.3%	49.6%	42.1%	25.1%
Imports	3.8%	0.6%	8.3%	63.1%	48.1%	27.0%
Services
Exports	2.7%	0.5%	3.6%	31.0%	12.7%	5.6%
Imports	5.8%	2.0%	1.1%	41.6%	7.1%	4.3%