Current account imbalances in the euro area

Abstract

While the current account balance for the euro area as a whole has been in balance, divergences in current account positions among the euro-area members have widened since the introduction of the common currency euro. During the last 13 years Portugal, Greece and Spain have run large and persistent current account deficits, whereas Luxembourg, the Netherlands, Finland or Germany have displayed during the same period large and persistent surpluses. However, there is no unambiguous agreement among economists, whether this divergence of current account positions of the euro-area countries mirrors growing intra-euro-area imbalances (Gros, 2012) or just reflects proper functioning of the European integration process (Schmitz and von Hagen, 2009). Therefore, the aim of this paper is to estimate equilibrium current account position for each of the original 12 euro area countries so that it is possible to assess whether the divergence of intra-euro current account balances could be explained on the basis of economic fundamentals or it just reflects misallocation of resources and thus macroeconomic imbalances. The equilibrium current account balance is estimated using a panel-econometric technique for a sample of 30 industrial countries, which represent euro-area member states and their main business partners, over the period 1993–2011. Economic fundamentals affecting the equilibrium current account position are selected on the basis of the saving-investment balance, the trade balance and the net income balance, to ensure that we take into an account all theoretically important explanatory variables. We find that the main determinants of current account norms in our sample are fiscal balance, a country’s net international investment position, oil balance and a country’s stage of economic development. The major part of the euro-area countries exhibits current account positions close to their equilibrium levels with the exception of the Netherlands and Finland which have persistently higher surpluses, while Portugal and Greece run larger current account deficits than is their norm.