Ten Misconceptions About the Euro Area Current Account: Why France Is the Missing Player in the Rebalancing Narrative

A Seemingly Technical Question: Why It Is Worth Reading Again in France

The euro area current account imbalance is an old issue. But its value has never lain in the balance of payments table itself, but in the deeper question it reveals: in a monetary union without a fiscal union, who bears the cost of economic adjustment, through what channels it is shifted, and who is allowed not to adjust.

In 2014, Jürgen Matthes of the Cologne Institute for Economic Research published “Ten Misconceptions About Euro Area Current Account Imbalances” in *Intereconomics*. At the time, the European Commission was conducting an in-depth review of Germany’s current account surplus, and the debate focused on whether the euro area’s overall surplus was a problem and whether the euro’s trajectory would destroy the rebalancing that had just begun in Southern Europe.

Rereading this article today, its data are outdated, but its analytical framework remains valid. And one judgment that is lightly passed over points precisely to France’s structural predicament: if the euro appreciates sharply, the rebalancing of Southern European countries will be severely hindered—as will that of “other countries such as France,” because price competitiveness would be eroded.

France has always occupied an awkward position in this debate: it is mentioned, but rarely analyzed as a protagonist. It is neither a crisis country nor a surplus country. Understanding this “in-between state” is key to understanding France’s economic position over the next decade.

Background: The Core Disagreement in That Debate

Before the crisis, large current account imbalances accumulated within the euro area. After the crisis, especially in the countries hardest hit by the European sovereign debt crisis, the imbalances narrowed significantly. According to Eurostat data, the euro area’s overall current account surplus rose to an average of 1.8% of GDP in the first three quarters of 2013, reaching 2.2% in the third quarter.

Around this change, Matthes summarized and refuted ten popular propositions, three of which are particularly important for understanding France.

First, a euro area surplus necessarily leads to euro appreciation. The author argues that, based on research by the IMF and the European Commission, structural factors such as demographics, welfare levels, the pace of fiscal consolidation, and private-sector deleveraging are themselves sufficient to explain a moderate surplus; the euro was not significantly overvalued or undervalued. More importantly, the main determinant of exchange rates is capital flows, not the current account. The 2014 configuration was: US GDP growth expected at 2.8%, the euro area at 1.1%; the US ten-year Treasury yield around 2.8%, Germany around 1.6%; and the Federal Reserve signaling an earlier rate hike. Logically, this combination should push capital from the euro area to the United States, making it more likely to push the euro down rather than up.

But he also retained a warning: if the surplus continues to expand, or capital flows unexpectedly reverse, a sharp euro appreciation cannot be ruled out. And once it appreciates, the damage will not be limited to Southern Europe.Second, TARGET2 credit delayed rebalancing in a problematic way. The author believes this is only half right. In 2013, the goods and services trade balances of Spain, Portugal, and Italy had already turned positive, while Greece still had a small deficit; except for Italy, the large adjustments required were completed in a relatively short time. Eurosystem liquidity did provide a buffer, but after 2012 this buffer was used more as a substitute for capital outflows than to finance current account deficits. Compared with the extremely rapid adjustment of the Baltic countries, Southern Europe was slower, but in a broader international comparison, Southern Europe's rebalancing was "very fast," "far faster than the typical current account rebalancing speed after large imbalances."

Third, Southern Europe's rebalancing relied solely on import contraction. Quite the opposite. Between 2008 and 2013, rebalancing in Spain and Portugal was overwhelmingly driven by export growth rather than import decline; in Italy the two were close; only in Greece was import decline the main driver. Since 2009, Greece's exports of goods and services increased by 5.8 percentage points of GDP, while imports increased by 1.7 percentage points.

The Deep Logic: An Asymmetric Adjustment Mechanism

Putting these three points together reveals a clear logical structure.

Adjustment in the euro area is asymmetric. Surplus countries (represented by Germany) face almost no adjustment pressure; all adjustment pressure falls on deficit countries; and deficit countries, unable to use the exchange rate instrument, can only complete adjustment through internal devaluation—suppressing wages, compressing domestic demand, and rebuilding exports.

Matthes's research actually proves that this mechanism "works": Southern Europe did rebuild its export sector in a relatively short period, and the export machines of Spain and Portugal were even healthier than before the crisis. But "effective" does not mean "symmetric," nor does it mean "universal."

It has an implicit premise: the economy being adjusted must have sufficient price and structural flexibility, as well as an export sector that can expand rapidly.

France does not fully possess either condition.

France's wage and price formation mechanisms have limited flexibility, public spending accounts for a high share of the economy, and the political cost of adjustment is extremely high; at the same time, in France's export structure, the sectors truly capable of global pricing power are concentrated in a few high-end areas, while mid-tier industrial exports face a double squeeze from German quality competition and Southern European cost competition. This means that when the euro strengthens, France is more likely than Germany to lose orders, and also has less political space than post-crisis Southern Europe to regain share through internal devaluation.

More subtle is the cost of financing. The spread between French sovereign debt and German debt has long been relatively narrow, and low financing costs have allowed France to maintain its fiscal and social model despite a persistent current account deficit. This constitutes a "curse of low-cost financing": in the gentlest possible way, it removes the urgency of adjustment. Southern Europe was forced to adjust by the market, Germany voluntarily maintained surpluses through export discipline, and France was permitted by cheap capital not to adjust.

What It Means for the French EconomyFor businesses. The exchange rate is not a financial variable for French companies but a strategic one. Luxury and aerospace companies with brand premiums can absorb exchange-rate fluctuations, but appreciation directly squeezes their euro-denominated revenue and profit margins. The truly vulnerable are mid-sized enterprises (ETIs) and small and medium-sized enterprises: they have neither the pricing power of luxury goods nor the technological monopoly position of German mid-sized firms, and are the first to lose orders when the euro strengthens. France's export resilience has long rested on a few sectors with "high profits, a narrow base"—luxury goods, aerospace, agricultural products, and tourism—sectors that are highly sensitive to global demand and exchange rates, while energy imports and a deficit in mid- and low-end manufacturing constitute a structural drag.

For industry. From a current-account perspective, France's energy policy has undervalued economic value. Hydrocarbon imports are a structural deficit item in France's trade balance; nuclear power and electrification are, in balance-of-payments terms, a form of "import substitution." This provides a second rationale for the green transition: it is not only climate policy but also balance-of-payments policy, and one of the few levers by which France can improve its current account on its own.

For consumers. Euro appreciation lowers the prices of imported consumer goods in the short term and improves household purchasing power, but at the cost of manufacturing orders and jobs. In France's consumption-led growth in the 2010s, this trade-off of "trading industry for purchasing power" was repeatedly paid. This is a long-term cost easily obscured by short-term data.

Spillover effects at the European and global levels

The euro area's overall surplus is the sum of surpluses in Germany, the Netherlands, and the Nordic countries. As long as surplus countries do not adjust, adjustment pressure will necessarily concentrate on deficit countries. This is the other side of Matthes's judgment: the euro area's surplus is moderate in aggregate but sharp in distribution.

Compared with the United Kingdom, France's model differs more clearly. The UK is an economy that finances its current-account deficit with capital inflows and relies on rents from finance and services; Germany is an economy that accumulates net external claims through manufacturing surpluses; France is neither—it has a strong public sector, a semi-open manufacturing sector, a set of world-leading consumer brands, and a persistent structural deficit. This "intermediate model" can be sustained when interest rates are low and external demand is stable, but it is exposed when either condition changes.

At the global level, if US growth and interest rates remain higher than those of the euro area, capital outflows will restrain euro appreciation, thereby buying time for Europe's export sector. But this is a buffer provided by external factors, not the result of improved internal competitiveness. Relying on an external buffer is a fragile equilibrium.

The next three to ten years: five trends worth continued attention

First, the main actors in euro area imbalances are shifting. Imbalances will not disappear; instead, they will gradually shift from "Southern European deficits versus German surpluses" to "German surpluses versus France and Southern Europe." France will increasingly become the central issue in the politics of euro area adjustment.Second, the exchange rate will increasingly become a real constraint on French industrial policy. France’s “silent acceptance” of the euro exchange rate is becoming increasingly difficult to sustain when the export sector is under pressure. Discussions about competitiveness-oriented exchange-rate management will return to the European policy agenda.

Third, the adjustment channel will shift from wages to energy and technology. Improvements in France’s current account are more likely to come from energy import substitution brought about by nuclear power and electrification, and from export expansion in high-end manufacturing, digital services, and artificial intelligence, rather than from compression of unit labor costs. This also means that France’s adjustment path is fundamentally different from that of Southern Europe.

Fourth, buffer instruments will reappear in new forms. The ECB’s asset purchases and common fiscal instruments functionally continue the role that TARGET2 played at the time: delaying adjustment and averting collapse. The cost is that adjustment is postponed to a moment when its political cost is higher.

Fifth, the focus of European economic governance will shift partly from fiscal discipline to competitiveness and imbalances. The annual assessment framework of the Macroeconomic Imbalance Procedure will persist, and France’s assessment reports will become a public window for observing the real progress of its structural reforms.

For French companies, the conclusion is clear: treat the exchange rate as a strategic assumption, not financial noise; build buffers in three areas—pricing power, energy costs, and supply-chain positioning; and do not misread short-term improvements in the current account as a resolution of the competitiveness problem.

For the French economy, the question is more fundamental: an economy that cheap capital has allowed to avoid adjusting must ultimately find a way of adjusting that depends neither on the exchange rate nor on austerity. This is precisely the most effective question that article from ten years ago poses for today.