Can Greece be saved?: current account, fiscal imbalances and competitiveness
Drawing on the existing literature on national saving and investment we attempt to identify and empirically analyze the main drivers of Greeceâ€™s current account position in recent decades and, especially, in the years following the euro adoption. Our results seem to provide broad-based support to the key findings of a number of earlier empirical studies on the determinants of Greeceâ€™s current account position. More specifically, the significant deterioration in the countryâ€™s current account position in recent years can be attributed to, among others: (i) accumulated loss of economic competitiveness against main trade-partner economies; (ii) pronounced fiscal policy relaxation following the euro adoption; (iii) the completion of domestic financial sector liberalization in the mid-90s and enhanced financial deepening post the countryâ€™s euro area entry. To assess the capacity of the new EU-IMF economic adjustment programme to stabilize Greeceâ€™s external position, we utilize our estimated econometric models to produce out-of-sample forecasts for the evolution of the current account in 2012-2016. Specifically, we examine a number of alternative scenarios encompassing varying degrees of policy-adjustment and success rates in implementing the agreed reforms. Assuming a broadly satisfactory pace of programme implementation, we forecast a steady improvement in the countryâ€™s current account position in the years ahead. This is deemed to be an important prerequisite for stabilizing and gradually starting to reduce Greeceâ€™s external debt, from what currently appear to be unsustainable levels.
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