THE EUROPEAN COMMISSION sits as non-resident to the euroarea in the convention of EU balance of payments (BOP) accounting, and has its own BOP published by Eurostat. Transactions between the euroarea and the Commission as part of the EU Budget or due to occasional EU borrowing operations, therefore, registers in their respective balance of payments. And this matters for forecasting the euroarea current account in the period ahead—a concept not yet grasped by either the IMF or, as today, the European Commission.
Consider the main items in the Commission BOP in the chart below; a current account surplus of between EUR30-60BN per year roughly offsets a capital account deficit. The difference is the financial account—accumulation of, say, deposits when current transfers exceed capital account debits.
Even this hides some detail on EU budget accounting. The next chart decomposes the current account, on the left, into the main components. The secondary income surplus represents mainly member state transfers to the EU budget, at nearly EUR100BN a year. Offsetting this, in part, is a primary income deficit, largely CAP payments to farmers. There is also a smaller, though persistent, service deficit.
The right side of the next chart also undertakes a geographical decomposition of net current account capital account flows between the euroarea and extra-euroarea (i.e., the rest of the world, including non-euroarea EU countries.) The net current account surplus is largely due to the euroarea. The capital account deficit, meanwhile, is roughly split evenly between the two. This represents net transfers from the euroarea to EU accession countries for cohesion purposes.
But there’s more. The financial account of the European Commission can be decomposed into major items as below. We see from this substantial portfolio borrowing in 2008-12, which represented program support for Eastern Europe (including Ukraine) and Portugal and Ireland. This is mirrored by other investment asset accumulation as these were back to back loans to member states, via EFSM, or near-neighbours.
Why does this matter? Well, the SURE and NGEU funds that are currently or prospectively being issued as part of the COVID response by the EU will result in a large increase in balance of payments flows from the Commission to member states, including the euroarea. In the case of SURE funds and NGEU loans, as with the above financial account example, there will be portfolio liabilities taken on in exchange for back-to-back lending to member states. But for NGEU transfers, there will be portfolio debt issued alongside current transfers to member states (a debit for the Commission). That is, rather than there being net debits on secondary income for the euroarea as a whole, once NGEU transfers emerge there will be substantial credits.
This matters, then, because the euroarea current account—which is already structurally in a surplus of 3% of GDP or more—will therefore register a larger surplus still once these grants register. Yet the European Commission’s Autumn forecasts today show barely a twitch in the euroarea current account surplus through 2022 (see page 53.) Since the grant element of NGEU is equal to EUR384BN over 4-6 years from 2021, with the majority going to the euroarea, at some point there will be a sizable impact. Even EUR50BN per year would be nearly ½% of GDP on the current account. And if the manufacturing cycle picks up sharply, the underlying current account could bounce further. As a back of the envelope, it is not impossible that the euroarea current account touches 5% of GDP in the next 3-4 years.
Of course, as noted before, the IMF also struggles in such matters. So, the Commission is not alone. But macroeconomics is more than mindless bean counting. There is an analytical imperative. Moreover, it is important to prepare the world for the impact of NGEU on the euroarea current account and explain why it is not (necessarily) creating negative macroeconomic externalities. Rather, ideally, it will provide a tailwind to the euroarea recovery such that the goods and service surplus falls to offset these growing transfers. Yet at the moment the Commission and IMF aren’t making the effort to understand these flows.