Some among the cognoscenti of European elite still crow that the crisis is behind us and point to the closing of current account deficits in Spain, Italy Portugal, and Greece as some evidence of this. However, as JPMorgan’s CIO David Cembalest notes, while, in prior cases, this development usually meant a broadening recovery was on the way; the collapse in imports has driven this move and dramatically flatters any overall improvement. Typically balance of payments crises are solved by rising exports and as Cembalest warns, Europe’s ability to endure the current collapse remains a major question mark.
Via JPMorgan’s Michael Cembalest,
The current account deficits in Spain, Italy, Portugal and Greece have now closed. In prior crises, this development usually meant a broadening recovery was on the way.
So, are closing European current account deficits as positive an omen as in the past? Such deficits typically close almost entirely due to rising exports. That’s not the case this time, as an import collapse flatters the overall improvement.
Europe’s ability to endure this remains a question mark.
The contribution from collapsing imports (and collapsing demand and employment) to the improvement in current account deficits, past and present, import collapse as % of current account improvement:
A Matter of Import in Portugal, Spain, Italy and Greece
“I read somewhere that their current accounts
Improved by impressively large amounts
If so, they’ll soon be recovering fast
At least that’s what’s been observed in the past.
But something’s amiss in that deficit chart –
The harlot’s cheek, beautied with plastering art*
Is how I’d describe anyone’s allusion
To crises resolved; it would be a delusion
Since the main thing here is import collapse,
Not jobs or exports or growth, perhaps.
Unlike other recov’ries seen or felt
This one is mostly a tightening belt.
So before you think an economy’s healed
Consider an adage herein revealed:
Current accounts of zero can mean success
Or that everyone’s under tremendous stress.”
* Hamlet, Act 3, Scene I