Europe’s rising external surplus now rivals China’s, reflecting weak investment and growing surpluses, pointing to a need for pro-investment reforms.

External imbalances have returned to the policy agenda, partly because current account imbalances have widened for the first time since the Global Financial Crisis (GFC) of the late 2000s. However, while China’s large surplus was the main counterpart to the United States’s deficit before the GFC, both China and the European Union are now projected to run comparable surpluses.

The shift in the EU current account from broadly balanced in the early 2000s to a persistent surplus of around 3 percent of GDP reflects the elimination of deficits in southern and eastern Europe by 2012, driven largely by declining investment. These were not offset by a fall in surpluses elsewhere in the EU and the EU’s current account surplus is likely to persist well beyond the medium term, until demographic shifts reduce savings rates. This is by itself unlikely to create significant problems for the global economy. However, it highlights an internal issue for several EU countries and for the EU as a whole: structurally weak domestic investment.

Not all investment-enhancing policies will reduce the surplus. For example, transitioning to fully-funded pension systems could support capital market development, investment and growth, but might also raise savings rates. But there is plenty of scope to both stimulate investment and lower the surplus: reforms to improve the business environment, further deepening and integration of European capital markets and EU fiscal rules reform to better support public investment.

Source : Bruegel