Might capital return to the euro zone?

Sin ce the beginning of 2018, bond capital has been flowing out of the euro zone; since the second quarter of 2018, equity capital has been flowing out of the euro zone; since the summer of 2018, this has been the case of short-term capital also. As the euro zone has a large external surplus, this has had little impact on euro long-term interest rates or on the euro’s exchange rate. But these capital outflows do explain the weakness of the euro zone’s equity market, particularly compared with the US market. Might international capital return to the euro zone? We believe this is unlikely: Interest rates are going to remain much higher in the United States than in the euro zone; Growth is going to remain much lower in the euro zone than in the United States; Italy’s crisis is set to last and may turn off investors.