The risks associated with European export-oriented economies' twin deficits

This article draws attention to the widening macroeconomic imbalances stemming from the unrelenting global Covid-19 pandemic, imbalances which take the form of "twin deficits". The pandemic, which has now subsided and resurged in several waves, and the related shutdowns of economies, especially in the services sector, have not only been visibly reflected in a considerable worsening of countries' fiscal positions (public budget balances), but may also result in a deterioration in their external positions (current account balances). On the fiscal side, this is due to extremely accommodative fiscal policy, motivated by governments' efforts to soften the impacts of the pandemic on the income of households and firms. However, anti-Covid and subsequent fiscal measures have also led to the creation of forced savings and to a shift in demand from services to tradable goods, satisfied in part by imports. This has gone hand in hand with disruptions to global value chains (GVCs) due to logistical problems and shortages of production inputs, which have reduced the export performance of some sectors (the automotive industry, for example). Economic theory tells us that twin deficits generally reduce countries' resilience and make them more susceptible to macroeconomic and financial instability. A forward-looking macroeconomic approach requires economic policy makers to better get to know this risk in advance and to try to prevent it from forming.