Euro parity and GBP and USD current account balances

Yesterday, was a strong dollar day but it was also a euro weakness day as the euro recorded 12-year and 8-year lows versus the USD and GBP respectively. I think what we are seeing here is an emergence of the eurozone as a current account surplus trading bloc whose balances are offset by deficits in the UK and the US. Over the longer-term, these imbalances are not sustainable politically or economically.

The last numbers I saw out of the UK were from early February showing the UK deficit unexpectedly widening to a 4-year high. That makes the UK trade deficit the largest since the coalition government came to power, and helps put their re-election hopes in peril. What does the Bank of England do in the face of this persistent current account deficit? I don’t know but it is clear that the UK trade balance is hurting from a weak euro.

The Wall Street Journal’s Real Time Economics blog has a good chart on the USD portion of this. It shows the U.S. non-oil trade flows in inflation adjusted terms.

What I see in this chart is a persistent wide current account deficit since 2000 that was closed during the Great Recession, but opened back up again afterwards. In the next cyclical downturn, we will definitely see this gap close and the result will be a sucking of demand out of the eurozone economy, particularly Germany, which is export-dependent. Unless Europe gets its institutional structures in order by that time, this is going to be a big problem because it will mean large government deficits that do not work in a Maastricht 3/60 context. And we will be right back in the kind of crisis we saw in 2010. Currency devaluations buy time, nothing more.

Meanwhile, the euro is through the 1.07 level and trading at 1.0622. Dollar – Euro parity is not a fantasy any more. It is just within reach.