External rebalancing in the euro area: progress made and what remains to be

Euro area countries with high current account deficits before the start of the crisis have now achieved balanced positions or even surpluses. This reflects substantial external rebalancing. The question is whether this is sufficient and the answer depends on whether levels of external indebtedness are sound. The analysis in this section shows that countries such as Estonia, Latvia and Slovakia corrected their current account positions early on in the crisis. At the same time, they have a level of indebtedness that does not pose sustainability risks for their economies and/or is slowly declining. Countries such as Spain and Portugal have stabilised their external positions and have current account surpluses that are helping to reduce their external indebtedness at a moderate pace. Nevertheless, their levels of indebtedness are high and require current account surpluses to continue. More efforts are required of Cyprus and, in particular, Greece if they are to improve their current account positions and reduce their indebtedness. In general, the process of external rebalancing is not finished, as there is still a need to address high stocks of debt. Moreover, the ability to achieve that is surrounded by significant risks that relate predominantly to persistently lower-than-expected inflation and growth.