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Current Account Imbalances in the Southern Euro Area

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  • Florence Jaumotte
  • Piyaporn Sodsriwiboon
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    Abstract

    The paper examines the causes, consequences, and potential cures of the large current account deficits in the Southern Euro Area (SEA). These were mostly driven by a decline in private saving rates. But it was the European Monetary Union and the Euro, which enabled these countries to maintain investment rates, and thus run larger current account deficits, by improving their access to the international pool of saving. The paper finds that the deficits in SEA in 2008 were larger than can be explained by fundamentals, though the situation varies substantially across countries. It also finds that although the global financial crisis has started to force some unwinding, the current account deficits are expected to remain high in the medium run, though again with substantial variation across countries. The paper argues these large external deficits pose risks to the economy and therefore matter, even in a currency union, and discusses some policy options to reduce them.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/139.

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    Length: 30
    Date of creation: 01 Jun 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/139

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    Related research

    Keywords: Current account deficits; European Union; Global Financial Crisis 2008-2009; Private savings;

    This paper has been announced in the following NEP Reports:

    References

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    1. Chinn, Menzie David & Ito, Hiro, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," Santa Cruz Department of Economics, Working Paper Series qt5pv1j341, Department of Economics, UC Santa Cruz.
    2. Javier J. Pérez & A. Jesús Sánchez, 2010. "Is there a signalling role for public wages? Evidence for the euro area based on macro data," Working Paper Series 1148, European Central Bank.
    3. Michele Ca’ Zorzi & Alexander Chudik & Alistair Dieppe, 2009. "Current account benchmarks for central and eastern Europe - a desperate search?," Working Paper Series 995, European Central Bank.
    4. Jörg Decressin & Emil Stavrev, 2009. "Current Accounts in a Currency Union," IMF Working Papers 09/127, International Monetary Fund.
    5. Abdul Abiad & Enrica Detragiache & Thierry Tressel, 2010. "A New Database of Financial Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 57(2), pages 281-302, June.
    6. Bogdan Lissovolik & Julio Escolano & Stefania Fabrizio & Werner Schule & Herman Z. Bennett & Stephen Tokarick & Yuan Xiao & Marialuz Moreno Badia & Eva Gutierrez & Iryna V. Ivaschenko, 2008. "Competitiveness in the Southern Euro Area: France, Greece, Italy, Portugal, and Spain," IMF Working Papers 08/112, International Monetary Fund.
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    Citations

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    Cited by:
    1. Matthieu Bussiere & Alexander Chudik & Arnaud Mehl, 2011. "How have global shocks impacted the real effective exchange rates of individual Euro area countries since the Euro's creation?," Globalization and Monetary Policy Institute Working Paper 102, Federal Reserve Bank of Dallas.
    2. Belke, Ansgar & Dreger, Christian, 2011. "Current account imbalances in the euro area: Catching up or competitiveness?," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48711, Verein für Socialpolitik / German Economic Association.
    3. Peter Wierts & Henk van Kerkhoff & Jakob de Haan, 2012. "Trade Dynamics in the Euro Area: The role of export destination and composition," DNB Working Papers 354, Netherlands Central Bank, Research Department.
    4. Harashima, Taiji, 2011. "A Mechanism of Inflation Differentials and Current Account Imbalances in the Euro Area," MPRA Paper 28121, University Library of Munich, Germany.
    5. Hubert Gabrisch & Karsten Staehr, 2012. "The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries," Working Papers 324, Institut für Ost- und Südosteuropaforschung (Institute for East and South-East European Studies).
    6. Francesco Giavazzi & Luigi Spaventa, 2011. "Why the current account may matter in a monetary union. Lesson from the financial crisis in the Euro area," Working Papers 426, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    7. Giavazzi, Francesco & Spaventa, Luigi, 2010. "Why the current account may matter in a monetary union: Lessons from the financial crisis in the Euro area," CEPR Discussion Papers 8008, C.E.P.R. Discussion Papers.

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