Current Account Imbalances in Europe
The European crisis is partly attributable to the sharp increase in external imbalances across Europe during the pre-crisis period. We examine current account imbalances in Europe over 1995-2007, together with the underlying saving and investment rates (and their subcomponents). We find that the discrete expansion in current account imbalances during the 2002-2007 period can be attributed to a strengthening in the link between growth forecasts and current account balances. A striking pattern was that greater optimism about future growth was associated with lower savings and higher construction investment, rather than investment in productive capital.
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