A March 10th report from Deutsche Bank Markets Research highlights that the Euroglut — a huge current account surplus in Europe reflecting a very large pool of excess savings — will have a major impact on global asset prices for the rest of this decade.
DB analysts George Saravelos and Robin Winkler argue that the Euroglut means the euro is likely to continue to fall for the foreseeable future. “The current pace of capital outflows is even larger than our expectations from last year. Combined with our estimates above we revise our EUR/USD forecasts lower. We now see EUR/USD moving down to 1.00 by year-end, 90 cents by 2016 and down to a trough of 85 cents by 2017.”
The Euroglut concept
The general idea of a Euroglut is that the giant current account surplus of European nations related to excess savings will have a significant impact on global asset prices for at least four or five years. Taken together with ECB quantitative easing and negative rates, Saravelos and WInkler argue that this surplus of savings is leading causing large-scale capital flight from Europe, resulting in a collapse in the euro and very low global bond yields.
Given that European portfolio outflows currently running at record highs, the DB analysts are now taking a look at how long these large outflows continue. They note” “The answer to this question is critical: the greater the European outflows, the more the euro can weaken and the lower global bond yields can stay.”
To answer the question, Saravelos and Winkler developed a model of the Euro-area’s net international investment position (NIIP). They highlight taht urope is currently a net debtor to the rest of the world (ie, foreigners own more European assets than European investors do in foreign countries). Therefore, because of a structural rise in saving preferences since the financial crisis, Europeans have now become net creditors to the rest of the world.
Their model indicates that the Eurozone’s NIIP must increase from -10% of GDP to at least 30% for Europe’s current account surplus to “become sustainable”. The analysts argue that this adjustment will need net capital outflows of at least 4 trillion euros, which is equal to the current pace of outflows for the next eight years. They note that adjustment will happen more quickly if the euro continues to weaken, or if the current account moderates, but the Euroglut situation is likely to last at least until the end of the current decade.