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Current Account Imbalances in the Southern Euro Area

  • Florence Jaumotte
  • Piyaporn Sodsriwiboon

The paper examines the causes, consequences, and potential cures of the large current account deficits in the Southern Euro Area (SEA). These were mostly driven by a decline in private saving rates. But it was the European Monetary Union and the Euro, which enabled these countries to maintain investment rates, and thus run larger current account deficits, by improving their access to the international pool of saving. The paper finds that the deficits in SEA in 2008 were larger than can be explained by fundamentals, though the situation varies substantially across countries. It also finds that although the global financial crisis has started to force some unwinding, the current account deficits are expected to remain high in the medium run, though again with substantial variation across countries. The paper argues these large external deficits pose risks to the economy and therefore matter, even in a currency union, and discusses some policy options to reduce them.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/139.

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Length: 49
Date of creation: 01 Jun 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/139
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  1. Menzie D. Chinn & Hiro Ito, 2005. "What Matters for Financial Development? Capital Controls, Institutions, and Interactions," NBER Working Papers 11370, National Bureau of Economic Research, Inc.
  2. Enrica Detragiache & Abdul Abiad & Thierry Tressel, 2008. "A New Database of Financial Reforms," IMF Working Papers 08/266, International Monetary Fund.
  3. Ca' Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2009. "Current account benchmarks for central and eastern Europe: a desperate search?," Working Paper Series 0995, European Central Bank.
  4. Pérez, Javier J. & Sánchez, Jesús, 2010. "Is there a signalling role for public wages? Evidence for the euro area based on macro data," Working Paper Series 1148, European Central Bank.
  5. Bogdan Lissovolik & Julio Escolano & Stefania Fabrizio & Werner Schule & Herman Z. Bennett & Stephen Tokarick & Yuan Xiao & Marialuz Moreno Badia & Eva Gutierrez & Iryna V. Ivaschenko, 2008. "Competitiveness in the Southern Euro Area; France, Greece, Italy, Portugal, and Spain," IMF Working Papers 08/112, International Monetary Fund.
  6. Jörg Decressin & Emil Stavrev, 2009. "Current Accounts in a Currency Union," IMF Working Papers 09/127, International Monetary Fund.
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