Euro periphery current account balances have almost all swung into surplus, which is often cited as positive evidence that competitiveness has been restored. But the swing from current account deficit to surplus has a cyclical component, reflecting depressed import volumes due to still large output gaps in some cases. We estimate cyclically-adjusted balances for a range of output gap estimates. Adjusting for slack, Euro periphery current accounts are likely still in deficit.

The Euro zone current account balance is in sizeable surplus, which some see as a sign the Euro is undervalued and needs to rise. But the headline surplus in part reflects persistently large output gaps, which may be inflating the external balance by depressing import volumes. We derive a cyclically-adjusted current account balance for the Euro zone, which turns out to be negative, potentially signaling Euro overvaluation.
 

Estimates for Euro periphery output gaps are oddly small, even where real GDP has fallen substantially in the last 10 years. These estimates implicitly assume lots of activity is permanently lost, with potential “bending” down, almost as if to validate low actual GDP. The reality is that economic slack on the periphery is likely still sizeable, and holding down underlying inflation despite unprecedented ECB easing.

FROG s ( F rivolously R elated O utput G aps) are oddly small output gap estimates, "¦ which reflect potential GDP bending down to meet years of weak

Earlier this week we introduced the concept of FROGs , where the abbreviation stands for F rivolously R elated O utput G aps. This is a gap that is