Standard Life Investments

Weekly Economic Briefing


Germany in pole position


When it comes to investment, the Eurozone has traditionally been a net borrower from the rest of the world, posting a negative net investment position (IIP) consistently since its establishment in 2000. However, that IIP position has been on an improving trend since the financial crisis; after reaching a trough of -18.5% of GDP in the first quarter of 2009, the Eurozone’s net foreign liabilities declined to just -4.5% of GDP in the third quarter of last year (see Chart 6). This improvement in the Eurozone’s external position has been partly driven by changing current account dynamics. Between 2000 and 2012, the average current account balance was close to zero, but it has since risen decisively into surplus territory, and is currently more than 3% of GDP. This has turned the Eurozone into a net exporter of capital to the rest of the world, allowing the stock of foreign assets owned by its residents to rise more quickly than the stock of Eurozone assets owned by foreign residents. With few signs that the Eurozone’s current account surplus is set to shrink meaningfully, its IIP is likely to turn positive within the next few years.

Tightening up In the black or in the red?

Of course, these aggregate figures mask vast differences in the external positions of the individual Eurozone economies. Germany in particular has run persistent large current account surpluses since the early 2000s, and has built a very strong net foreign asset positions as a result. By contrast, persistent deficit countries have built up large net foreign liability positions. We do not have complete IIP data for 2017 yet, but data for 2016 illustrates the scale of the divergences (see Chart 7). The German net IIP stood at 54.4% of GDP (€1.7trn) in 2016, behind only the Netherlands at 67.7%. Greece and Ireland were the largest net creditors at -139% and -176.2% respectively, though both have improved their current account positions substantially in recent years, meaning that their external positions are no longer deteriorating. Italy and Spain have also shifted from current account deficit to surplus countries since the Eurozone crisis, implying that they are now net capital exporters to the rest of the world.

Drilling further into the detail of Germany’s external position, its €8.3trn of foreign assets is fairly evenly distributed between portfolio investments (€2.8trn), ‘other investments’ (€2.8trn) and direct investment (€1.8trn). While the stock of Germany’s net direct assets has been on an upward trend over many years, the stock of net portfolio assets has undergone the biggest transformation, moving from a net liability of -€533bn in Q3 2011 to +€492bn in Q3 2017. This reflects both a decline in the stock of Germany’s portfolio liabilities since 2015 and a broader ratcheting up of portfolio investment assets across shares, investment fund shares, and long-term debt securities. Within direct investment abroad, equity capital assets comprise the largest share of the stock at €1.4trn, while debt instruments are just €486bn. However, the shares invert when it comes to inward FDI, with equity capital of €576bn and debt instruments of €780bn. The combined €1.36trn FDI stock reflects Germany’s attractiveness to foreign investors, ranking fifth in global FDI stock rankings. Unsurprisingly, other EU countries are the largest source of inward FDI to the German economy. However, Chinese interest in Germany is on the rise as it invested in 281 direct projects in 2016, with the US, UK and Switzerland trailing behind.

Stephanie Kelly, Political Economist