Macroeconomic Еxternal (Im)Balances within the Eurozone: Core Vs Periphery

Since the foundation of the eurozone (EZ) until the crisis outbreak, the macroeconomic imbalances between EZ core and EZ periphery have been identified at the internal and external plan. Growing external divergence was evident in the precrisis period reflected in the chronic current account deficit of the periphery, and vice versa for the core EZ members. However, external imbalance within the EZ has been substantially narrowed in the postcrisis period. Based on the panel data framework, crucial factors of current account improvement/worsening are identified in the precrisis 1999-2007 period, as well as the postcrisis 2008-2017 period. Random effect model with standard errors robust to autocorrelation and heteroskedasticity is estimated, in which current account is analysed in dependence from economic growth, fiscal balance, EZ interest rate, real effective exchange rate, openness and dummy variable for the EZ core/periphery. Empirical findings for the precrisis period confirm macroeconomic overheating of the periphery as the main cause of current account worsening, while the postcrisis improvement has been achieved mainly through fiscal contraction and European Central Bank (ECB) loosened monetary stance.