External Imbalances in the Euro Area

Abstract

The paper examines the extent to which current account imbalances of euro area countries are related to intra-euro area factors and to external trade shocks. We argue that the traditional explanations for the rising imbalances are correct, but are incomplete. We uncover a large impact of declines in export competitiveness and asymmetric trade developments vis-à-vis the rest of the world -in particular vis-à-vis China, Central and Eastern Europe, and oil exporterson the external balance of euro area debtor countries. While current account imbalances of euro area deficit countries vis-à-vis the rest of the world increased, they were financed mostly by intra-euro area capital inflows (in particular by the purchase of government and financial institutions' securities, and cross-border interbank lending) which permitted external imbalances to grow over time.JEL Classification Numbers: E2, F14, F3, F41, F43, O52

Financial Globalisation and the Crisis

“…To the extent that these growth projections were extrapolations from the unsustainable expansion of the nontraded sectors in some countries (Ireland and Spain and some Eastern European countries come to mind), these types of current account deficits were not necessarily welfare enhancing. Indeed, these authors show that a primary source of the covariation between growth projections and the current account during [2003][2004][2005][2006][2007] was an increase in construction investment in the deficit countries, which was a danger signal in terms of repayment capacity (see also Blanchard 2007, Giavazzi and Spaventa 2011, Chen et al 2012.…”

Real Effective Exchange Rate Imbalances and Macroeconomic Adjustments: Evidence from the CEMAC Zone

“…German firms have continued their outward integration by setting-up production platforms in emerging Europe in order to take advantage of higher return on capital and lower wage costs which boosted competitiveness and exports. This easy financing continued until the crisis erupted and allowed deficit countries to sustain appreciating real effective exchange rates (which have also been driven by the nominal appreciation of the euro) and has delayed the adjustment needed to end the growing divergence of trade performance within the monetary union (Chen et al, 2012). The debate in the literature on structural adjustment and macroeconomic stabilization has emphasized the crucial role played by real exchange rate (owing to the importance of export promotion) for the generation of optimal paths of employment and output (Mussa, 1974;Edwards & Van Wijnbergen, 1986;Obstfeld & Rogoff, 1996;Acemoglu et al, 2003;Abdih & Tsangarides, 2010).…”

Eurozone’s Future: The Political Economy of Structural Convergence

“…Combined with the protracted differential impact of the rise of emerging markets on different EU member states (positive for North, but basically negative for South -see Chen et al, 2012), real divergencies triggered a creeping political instability, clearly visible recently. This trend was only exacerbated by social political trends, among which the immigration, both intra and extra EU plays a significant role.…”