Current Account ‘Core–Periphery Dualism’ in the EMU

Abstract

Current account (CA) dispersion within European Union (EU) Member States has been increasing progressively since the 1990s. Interestingly, the persistent deficits in many peripheral countries have not been accompanied by a significant growth process able to stimulate a log run rebalancing as neoclassical theory predicts. To shed light on the issue, this paper investigates the determinants of Eurozone CA imbalances, focusing on the role played by financial integration. The analysis considers two samples of 22 OECD and 15 EU countries, three time horizons corresponding to various steps in European integration, different control variables and several panel econometric methods. The results suggest that within the EU group of countries financial integration contributed to explain the CA deterioration in the peripheral countries especially in the post‐EMU period creating an asymmetric behaviour within the EMU. From a financial stability perspective, this ‘divergence’ could hinder the effectiveness of monetary policy. By reducing the apparent benefits of participating in the monetary union, it also raises the risk of a break‐up.

Determinants of the Current Account Balances among Central and Eastern European Countries in the European Union

“…Since opening up their economies around the late 1990s, the CEE countries have attracted growing investments from western EU countries. The unique characteristics of the CEE countries, such as lower per capita income and higher productivity growth, have allowed foreign investors to earn higher expected rates of return on capitals 7 . This result contradicts previous studies which found a negative relationship between foreign direct investment and current account balance.…”

“…Moreover, the euro adoption has worsened their current account deficit problem as the overvalued euro currency has diminished the competitiveness of their export products 9 . The eurozone debt crisis has highlighted the fact that the EU common fiscal and monetary policies have failed to reduce the persistent divergences in current account balances between these countries 7 . Finally, the fiscal policy position measured by the government budget is the key determinant of current account balance in the periphery eurozone countries.…”

“…EMU accession would allow these countries to enhance their economic policy coordination with the eurozone countries. The existing legislations would ensure better surveillance of macroeconomic and financial imbalances to improve economic governance in the eurozone 7 . Given closer eurozone economic coordination, the CEE countries can better monitor stable capital flows from other eurozone countries to boost their stock market liquidity.…”

“…This is surprising as countries with lower income per capita and higher productivity growth would attract foreign direct investment inflow because of higher expected rates of return on capital. The productivity of the invested capitals would restore a current account balance through competitiveness gains in tradable sectors and reimbursement of the external debts 7 . However, the CEE countries have run larger current account deficits despite their EU accession.…”

Heterogeneous effects of competitiveness shocks on macroeconomic performance across euro area countries

“…Policy‐oriented studies such as Holinski, Kool, and Muysken (), Tressel and Wang () and Wyplosz () emphasise the importance of the domestic business cycle for external balances. De Santis and Cesaroni () consider current account imbalances in the euro area and conclude that competitiveness appears to become less important over time, but equally that there seems to be substantial heterogeneity between the core and the periphery of the EU.…”