What ails Europe is not “secular stagnation” or “normalisation”, but rather the much more specific problem of a “Euroglut”.
So, at least, says George Saravelos at Deutsche Bank.
His argument relates to the idea that the global imbalances which were created by Europe’s massive current account surplus are becoming the defining variables which will drive a weaker euro, low long-end yields and exceptionally flat global yield curves, as well as ongoing inflows into “good” EM assets.
In short, Saravelos argues that Europe’s huge excess savings combined with aggressive ECB easing will lead to some of the largest capital outflows in the history of financial markets.
As he explains on Monday:
Euroglut is a global imbalances problem. It refers to the lack of European domestic demand caused by the Eurozone crisis. The clearest evidence of Euroglut is Europe’s high unemployment rate combined with a record current account surplus. Both are a reflection of the same problem: an excess of savings over investment opportunities. Euroglut is special for one and only reason: it is very, very big. At around 400bn USD each year, Europe’s current account surplus is bigger than China’s in the 2000s. If sustained, it would be the largest surplus ever generated in the history of global financial markets. This matters.
As for the global impact (our emphasis):
Euroglut means that as the world’s biggest savers, Europeans will drive international capital flow trends for the rest of this decade. Europe will become the 21st century’s largest capital exporter. This statement is close to an accounting identity – a surplus on the current account implies capital outflows elsewhere.
Our premise is that the next few years will mark the beginning of very large European purchases of foreign assets. T he ECB plays a fundamental role here: by pushing down real yields and creating a domestic “asset shortage”, it is incentivizing European reach for yield abroad.
Think about policy over the next few years: at least 500bn-1 trillion of excess cash will be sitting in European bank accounts “earning” a negative rate of 20bps. In the meantime, asset-purchases will drive yields down across the board – there will be nothing with yield left to buy.
Here, meanwhile, is the global imbalance picture in chart form:
So, the basic argument here is that while China’s surplus drove Asian policy in the 2000s, the Euroglut will now become the key determining factor driving European policy from now on.
And extrapolating forwards, Saravelos warns there’s not much that other European countries that also run current account surpluses can do about it other than impose their own negative-yielding/fx floor policies to prevent the hot potato coming to them. In fact, they may just end up compounding the hot potato problem, by effectively being forced to tie their policies in reactive style to that of the Eurozone’s.
On that basis, Saravelos predicts most of the European continent could end up with negative rates or FX managed-regimes in no time at all.
Or as he puts it:
Europe is the new China, and via large demand for foreign assets, it will play a dominant role in driving global asset price trends for the remainder of this decade.
Related links: All about the eurodollars – FT Alphaville Negative rates coverage – FT Alphaville Global macroeconomic imbalances are shrinking (and not) – FT Alphaville Financial globalisation not so great – FT Alphaville