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Why the current account may matter in a monetary union: Lessons from the financial crisis in the Euro area

  • Giavazzi, Francesco
  • Spaventa, Luigi

The current account has always been a neglected variable in the management of the Euro area and in the assessment of its members' performance; so has, as a consequence, the savings-investment balance. This paper first reviews the arguments that explain this attitude and justify, under some conditions and in some cases, the persistence of current account deficits. It then examines some peculiar features of the growth experience under monetary union in four Euro area countries which do not conform to the conventional convergence pattern. Models establishing the optimality of a succession of current account deficits in a catching-up process implicitly assume that the intertemporal budget constraint is satisfied, so that the accumulation of foreign liabilities is matched by future surpluses. In section 3 we first introduce explicitly this constraint in a simple two-period, two-good model and show that its fulfilment requires that growth be driven by an adequate increase of the country's production capacity of traded goods and services. By examining the composition of output and demand we show that this has not been the case in the four countries considered and argue that monetary union has helped relax the necessary discipline. The common monetary policy moreover did nothing to prevent an extraordinary growth of credit that fed the imbalances in the four countries. The paper closes addressing some policy issues related to the future sustainability o the monetray union.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8008.

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Date of creation: Sep 2010
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Handle: RePEc:cpr:ceprdp:8008
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  1. Javier Suarez, 2010. "The Spanish Crisis: Background And Policy Challenges," Working Papers wp2010_1005, CEMFI.
  2. Gabriel Fagan & Vitor Gaspar, 2008. "Macroeconomic Adjustment to Monetary Union," Working Papers 2008/14, Czech National Bank, Research Department.
  3. Robert J. Barro & Xavier Sala-i-Martin, 2003. "Economic Growth, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262025531, June.
  4. Florence Jaumotte & Piyaporn Sodsriwiboon, 2010. "Current Account Imbalances in the Southern Euro Area," IMF Working Papers 10/139, International Monetary Fund.
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