US tariffs, MNEs, AI shrink euro area surplus in 2025
The euro area current account surplus significantly narrowed in 2025, falling to 1.7 percent of GDP from 2.7 percent in 2024. This decline was primarily driven by US trade tariffs, activities of US multinational enterprises, structural shifts in global trade, and rising digital and AI-related investment.
Services and income flows shift
The narrowing of the euro area current account surplus in 2025 was mainly due to developments in services trade and income flows, rather than goods trade.
The goods surplus increased marginally from 2.2 percent of GDP in 2024 to 2.3 percent in 2025.
However, the primary income balance shifted from a 0.4 percent surplus to a 0.3 percent deficit, and the services surplus reduced from 1.2 percent to 0.9 percent.
Geographically, the shift was pronounced with the United States, moving from a 0.1 percent surplus in 2024 to a 0.4 percent deficit in 2025, despite a larger goods surplus.
The euro area current account deficit vis-à-vis China widened from 0.7 percent to 1.0 percent, in line with an increase in the goods deficit.
Excluding the energy shock period of 2022-2023, this was the lowest surplus since 2012.
MNEs, tariffs, and Chinese competition
The switch to a deficit with the United States in 2025 is tied to US multinational enterprises (MNEs).
Their euro area affiliates boosted goods exports, like pharmaceuticals, but increased services and income deficits via intellectual property charges and profit repatriation.
US trade tariffs, announced in April 2025, also reduced euro area machinery exports.
Simultaneously, the widening deficit with China arose from intense competition, particularly in machinery and manufactured products.
China's strong supply chain, overcapacity, and non-market policies led to a nearly 10 percent surge in import volumes in 2025, undermining euro area export competitiveness.
Domestic investment rebalances external flows
The current account narrowing reflects a decline in net lending by non-financial corporations, consistent with rising domestic investment needs, particularly in digital and AI-related sectors.
This indicates a greater mobilization of euro area saving towards domestic investment, with AI spending recorded as capital formation or intermediate consumption.
While AI-related goods imports had limited impact, increased AI adoption contributed to higher services imports, especially from the US.