Charts: Eurozone sectoral balances, periphery vs. core

The study mentioned earlier here also talked briefly on how sectoral balances for various eurozone countries look like.

Hopefully by now you would have realised that because of the rules of national income and product accounting, that trade surplus of any given country must necessarily equal to private sector net saving (i.e. private gross saving less investment) an public sector net saving (i.e. government income less expenditure), allowing for statistical discrepancies.

All peripheral countries under pressures have been running not only government deficits, but also trade deficits in the run-up of the debt crisis, and this is not a surprising thing to be happening because savings from the domestic sector must necessarily be equal to foreign sector. This is all fine as long as foreigners are willing to recycle their trade surplus back into the country in forms of bank lending, portfolio investment, direct investment, etc. When foreigners are no longer willing to do so, these countries ran into a debt crisis which is actually rather more similar to a classic balance-of-payment crisis under gold standard, but this is relatively not a problem for country running a free-floating exchange rate regime.

Previously, I have already posted the sectoral balances for the US and Australia. Here from Rainer Maurer’s paper, I have picked a few sectoral balances chart for Germany and periphery.

For Germany, the blue line is negative of current account surplus, thus the line below zero means that Germany has been running trade surplus, more or less. That implies that private net saving together with public sector net saving taken together must be positive. And indeed that is that case, with German citizens running high saving rates and the German government running a very modest deficits.

The chart below is Greece. As you can see, Greece has been running deficits for all sectors until the financial crisis. After the financial crisis, the private sector tightened the belt very substantially, thus turning the net saving level into positive territory, while government deficits initially rose, then fell as austerity started. Overall impact is that Greece is now running a smaller current account deficits.

Meanwhile, Spain was having a rather different problem. Again, the country has been running trade deficits in the run-up to the financial crisis, yet the government has actually been running a small budget surplus in the years prior to the Lehman’s collapse. It was the private sector which has greatly increased its deficits (i.e. increased borrowing). That is the Spanish real estate bubble was about. Now that the real estate bubble is bust, private sector has drastically increased the net saving levels, while the government has turned from running a small surplus to a massive deficits.

Italy, on the other hand, had an opposite problem. Italy, too, has been running trade deficit, yet the private sector has been saving throughout, unlike Spain. Rather, the Italian government has been running budget deficits throughout the years.

Reference:
Maurer, R.W. (2012). Why Austerity Can Be Self-Defeating for Member States of a Currency Union. Social Science Research Network.

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.