## _wp13169 - References

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---

### Introduction and overview
- On the eve of the global financial crisis, a number of euro area periphery countries (Greece, Ireland, Portugal, Spain) and the Baltic countries faced large and growing current account deficits.
- Two main explanations for widening current account deficits in the mid-2000s:
  - Deteriorating export performance due to a steady deterioration of competitiveness.
  - A domestic demand-driven boom stemming from excessive optimism, capital flow-driven cheap credit, and fiscal excess.
- Price indicators:
  - Significant appreciation of the CPI-based REER and sizable increases in unit labor costs (ULCs) economy-wide for many affected countries.
- Quantity indicators:
  - Exports-to-GDP ratios were relatively stable or increased in the 2000s for many of these countries; merchandise export market share was flat in the euro era except for Ireland (shift to services) and the Baltics (market share grew).

### Principal findings on drivers of imbalances
- Divergence between economy-wide ULC increases and stable export-sector performance:
  - Limited increase in tradable-sector ULCs in most countries, but sizable increase in non-tradable-sector ULCs (Figure 5 pattern).
  - Trade balance deterioration often driven by surging imports arising from domestic demand booms while exports remained strong.
- Non-trade components materially contributed to current account deterioration:
  - Transfers declined and net income payments rose, in several cases worsening current accounts more than trade balances.
  - Average worsening of the net income balance was "2 to 3 percent of GDP" over the period examined.
- Country heterogeneity:
  - Some countries (Baltics, Spain, Greece, Ireland) experienced large capital inflows and optimism-driven booms that raised non-tradable ULCs and imports.
  - Others (Greece, Portugal) experienced declines in transfers that worsened the current account; Greece additionally had strong fiscal profligacy.
- Empirical evidence — merchandise export market share (ex-Euro Area) 1999–2007 (Table 1):
  - Greece: 1999 0.13% → 2000 0.14% → 2007 0.13% → % change 99–07 -2%
  - Ireland: 1999 1.05% → 2000 1.00% → 2007 0.70% → % change 99–07 -33%
  - Portugal: 1999 0.19% → 2000 0.17% → 2007 0.17% → % change 99–07 -12%
  - Spain: 1999 0.99% → 2000 0.93% → 2007 1.06% → % change 99–07 7%
  - Estonia: 1999 0.05% → 2000 0.04% → 2007 0.07% → % change 99–07 55%
  - Latvia: 1999 0.03% → 2000 0.02% → 2007 0.05% → % change 99–07 90%
  - Lithuania: 1999 0.05% → 2000 0.05% → 2007 0.12% → % change 99–07 150%
- Specific country numeric highlights:
  - Greece:
    - Current account deficit about "14½ percent of GDP" in 2007.
    - Transfers fell from roughly "7 percent of GDP" (mid-1990s peak) to "less than 1 percent of GDP" by 2007.
    - Exports-to-GDP rose from an average of "14 percent in 1995–99" to "21.9 percent in 2007".
    - Imports rose from "22.5 percent" to "33.1 percent" of GDP.
  - Portugal:
    - Transfers declined by "about 6 percentage points of GDP" and net income payments increased by "4½ percentage point of GDP", accounting for all deterioration of the current account.
    - Trade deficits of "7–8 percent of GDP" persisted while the current account moved from near balance in 1992–93 to a deficit of "more than 10 percent of GDP" in 2007.
  - Spain:
    - Current account deteriorated to a deficit of "10 percent of GDP" in 2007.
    - Manufacturing ULC-based REER appreciated by "about 20 percent" over the period.
  - Ireland:
    - Current account deficit about "5½ percent of GDP" in 2007.
    - Deterioration by "about 9 percentage points in the previous 10 years".
    - Trade balance deteriorated by "roughly 3 percentage points", net income payments rose by "roughly 3 percentage points", and transfers declined "by more than 3 percentage points".
  - Baltics (Estonia, Latvia, Lithuania):
    - Large trade and current account deficits since independence, growing into the crisis.
    - Export sector performance remained strong overall with gains in global merchandise export market shares for Lithuania in particular.
    - Imports grew faster than exports due to strong domestic demand.

### Mechanisms and diagnostics
- Export-led deterioration scenario:
  - Predicts rising tradable-sector ULC, REER appreciation, declining export volumes or export-to-GDP ratios, and falling global market share.
- Import-led (demand boom) scenario:
  - Predicts large increases in non-tradable ULCs, rising imports, strong output growth (possibly housing booms), and capital inflows or optimism.
  - Example: Latvia showed dramatic net capital inflows and sharply rising ULCs; Ireland, Spain, and Greece showed rapid house price increases.
- Transfer- and income-driven scenario:
  - Declining transfers (private remittances and official transfers) reduce income; if households/firms borrow to maintain spending, current account worsens via rising net income payments without immediate declines in output or ULC.
  - Greece and Portugal exhibit this pattern where transfers fell but consumption and investment did not decline, and net income payments rose.

### Policy implications and recommendations
- Relative price adjustment:
  - A substantial relative price adjustment (real depreciation) is likely necessary for more sizable gains in export performance to prevent re-emergence of deficits as economies recover toward full employment.
- External financing support:
  - External financing support will be needed, in part to offset the high net income payments while countries adjust.
- Surveillance beyond fiscal policy:
  - Surveillance focused solely on fiscal policy risks missing key vulnerabilities stemming from broad economy borrowing, lending booms, or consumption booms driven by transfers or capital inflows.
- Nominal GDP growth:
  - It is important to sustain nominal GDP growth to avoid exacerbating debt sustainability in the euro area periphery where both sovereign debt and private debt burdens are high.
- Adjustment heterogeneity:
  - Adjustment needs differ across countries depending on whether imbalances were driven by import booms, transfer declines, or export competitiveness — policy responses should be tailored accordingly.
- Cyclical versus structural improvements:
  - Post-crisis current account improvements are partly cyclical (import contraction) and partly structural; much productivity improvement has stemmed from labor shedding, and large output gaps imply sizable cyclically-adjusted current account deficits remain in most countries.

### Concluding synthesis
- Common feature across affected countries: despite rising economy-wide ULCs, export performance broadly did not decline during 1999–2007; instead, growing current account deficits were largely driven by import increases and non-trade factors (declining transfers, rising net income payments).
- Country narratives:
  - Baltics, Spain, Ireland: fit a capital inflow / domestic boom narrative.
  - Greece, Portugal: fit a transfers-decline and borrowing-to-sustain-spending narrative.
- Policy priorities to restore external balances:
  - Both relative price adjustment and external financing support are required.
  - Sustaining nominal GDP growth is crucial for debt dynamics given accumulated net foreign liabilities and worsening net income balances.

### Appendix. Merchandise Export Market Share — key series (in percent)
- Table coverage: Merchandise Export Market Shares (in percent) by destination group and year for 1995–2007.
- Countries covered in the excerpt: Greece, Ireland, Portugal, Spain, Estonia, Latvia, Lithuania.
- Selected exact series end-points and start-points (World market share, 1995 and 2007) as reported:
  - Greece — World 0.213 (1995); World 0.165 (2007).
  - Ireland — World 0.847 (1995); World 0.849 (2007).
  - Portugal — World 0.450 (1995); World 0.367 (2007).
  - Spain — World 1.781 (1995); World 1.761 (2007).
  - Estonia — World 0.036 (1995); World 0.077 (2007).
  - Latvia — World 0.025 (1995); World 0.058 (2007).
  - Lithuania — World 0.053 (1995); World 0.120 (2007).
- Regional breakdowns included for each country (examples of region labels used in the table): Advanced Economies; Euro Area; Other Advanced; Emerging and Developing Economies; Developing Asia; Europe; Middle East and North Africa; Sub-Saharan Africa; Western Hemisphere.
- Data sources as reported in the table caption: IMF, Direction of Trade Statistics; and IMF staff estimates.

*Italic: Source — IMF staff analysis and figures as presented in the supplied content.*

### References .............................................................................................................

### _wp13169 - References

### Introduction and overview
- On the eve of the global financial crisis, a number of euro area periphery countries (Greece, Ireland, Portugal, Spain) and the Baltic countries faced large and growing current account deficits.
- Two main explanations for widening current account deficits in the mid-2000s:
  - Deteriorating export performance due to a steady deterioration of competitiveness.
  - A domestic demand-driven boom stemming from excessive optimism, capital flow-driven cheap credit, and fiscal excess.
- Price indicators: significant appreciation of the CPI-based REER and sizable increases in unit labor costs (ULCs) economy-wide for many affected countries.
- Quantity indicators: exports-to-GDP ratios were relatively stable or increased in the 2000s for many of these countries; merchandise export market share was flat in the euro era except for Ireland (shift to services) and the Baltics (market share grew).

### Principal findings on drivers of imbalances
- Divergence between economy-wide ULC increases and stable export-sector performance:
  - Limited increase in tradable-sector ULCs in most countries, but sizable increase in non-tradable-sector ULCs (Figure 5 pattern).
  - Trade balance deterioration often driven by surging imports arising from domestic demand booms while exports remained strong.
- Non-trade components materially contributed to current account deterioration:
  - Transfers declined and net income payments rose, in several cases worsening current accounts more than trade balances.
  - Average worsening of the net income balance was "2 to 3 percent of GDP" over the period examined.
- Country heterogeneity:
  - Some countries (Baltics, Spain, Greece, Ireland) experienced large capital inflows and optimism-driven booms that raised non-tradable ULCs and imports.
  - Others (Greece, Portugal) experienced declines in transfers that worsened the current account; Greece additionally had strong fiscal profligacy.
- Empirical evidence summarized:
  - Merchandise export market share (ex-Euro Area) 1999–2007 (Table 1):
    - Greece: 1999 0.13% → 2000 0.14% → 2007 0.13% → % change 99–07 -2%
    - Ireland: 1999 1.05% → 2000 1.00% → 2007 0.70% → % change 99–07 -33%
    - Portugal: 1999 0.19% → 2000 0.17% → 2007 0.17% → % change 99–07 -12%
    - Spain: 1999 0.99% → 2000 0.93% → 2007 1.06% → % change 99–07 7%
    - Estonia: 1999 0.05% → 2000 0.04% → 2007 0.07% → % change 99–07 55%
    - Latvia: 1999 0.03% → 2000 0.02% → 2007 0.05% → % change 99–07 90%
    - Lithuania: 1999 0.05% → 2000 0.05% → 2007 0.12% → % change 99–07 150%
- Specific country numeric highlights:
  - Greece: current account deficit about "14½ percent of GDP" in 2007; transfers fell from roughly "7 percent of GDP" (mid-1990s peak) to "less than 1 percent of GDP" by 2007; exports-to-GDP rose from an average of "14 percent in 1995–99" to "21.9 percent in 2007"; imports rose from "22.5 percent" to "33.1 percent" of GDP.
  - Portugal: transfers declined by "about 6 percentage points of GDP" and net income payments increased by "4½ percentage point of GDP", accounting for all deterioration of the current account; trade deficits of "7–8 percent of GDP" persisted while the current account moved from near balance in 1992–93 to a deficit of "more than 10 percent of GDP" in 2007.
  - Spain: current account deteriorated to a deficit of "10 percent of GDP" in 2007; manufacturing ULC-based REER appreciated by "about 20 percent" over the period.
  - Ireland: current account deficit about "5½ percent of GDP" in 2007; deterioration by "about 9 percentage points in the previous 10 years"; trade balance deteriorated by "roughly 3 percentage points", net income payments rose by "roughly 3 percentage points", and transfers declined "by more than 3 percentage points".
  - Baltics (Estonia, Latvia, Lithuania): large trade and current account deficits since independence, growing into the crisis; export sector performance remained strong overall with gains in global merchandise export market shares for Lithuania in particular; imports grew faster than exports due to strong domestic demand.

### Mechanisms and diagnostics
- Export-led deterioration scenario:
  - Predicts rising tradable-sector ULC, REER appreciation, declining export volumes or export-to-GDP ratios, and falling global market share.
- Import-led (demand boom) scenario:
  - Predicts large increases in non-tradable ULCs, rising imports, strong output growth (possibly housing booms), and capital inflows or optimism.
  - Example: Latvia showed dramatic net capital inflows and sharply rising ULCs; Ireland, Spain, and Greece showed rapid house price increases.
- Transfer- and income-driven scenario:
  - Declining transfers (private remittances and official transfers) reduce income; if households/firms borrow to maintain spending, current account worsens via rising net income payments without immediate declines in output or ULC.
  - Greece and Portugal exhibit this pattern where transfers fell but consumption and investment did not decline, and net income payments rose.

### Policy implications and recommendations (as given in the text)
- Relative price adjustment is needed:
  - A substantial relative price adjustment (real depreciation) is likely necessary for more sizable gains in export performance to prevent re-emergence of deficits as economies recover toward full employment.
- External financing support:
  - External financing support will be needed, in part to offset the high net income payments while countries adjust.
- Surveillance beyond fiscal policy:
  - Surveillance focused solely on fiscal policy risks missing key vulnerabilities stemming from broad economy borrowing, lending booms, or consumption booms driven by transfers or capital inflows.
- Nominal GDP growth:
  - It is important to sustain nominal GDP growth to avoid exacerbating debt sustainability in the euro area periphery where both sovereign debt and private debt burdens are high.
- Adjustment heterogeneity:
  - Adjustment needs differ across countries depending on whether imbalances were driven by import booms, transfer declines, or export competitiveness — policy responses should be tailored accordingly.
- Cyclical versus structural improvements:
  - Post-crisis current account improvements are partly cyclical (import contraction) and partly structural; much productivity improvement has stemmed from labor shedding, and large output gaps imply sizable cyclically-adjusted current account deficits remain in most countries.

### Concluding synthesis
- Common feature across affected countries: despite rising economy-wide ULCs, export performance broadly did not decline during 1999–2007; instead, growing current account deficits were largely driven by import increases and non-trade factors (declining transfers, rising net income payments).
- Some countries (Baltics, Spain, Ireland) fit a capital inflow / domestic boom narrative; others (Greece, Portugal) fit a transfers-decline and borrowing-to-sustain-spending narrative.
- The accumulation of net foreign liabilities and worsening net income balances mean that restoring external balances requires both relative price adjustment and external financing support, while sustaining nominal GDP growth is crucial for debt dynamics.

*Italic: Source — IMF staff analysis and figures as presented in the supplied content.*

### References

### _wp13169 - References

### References
- Atoyan, Ruben, Jonathan Manning, and Jesmin Rahman, 2013, “Rebalancing: Evidence from Current Account Adjustment in Europe,” IMF Working Paper, WP/13/74 (Washington: International Monetary Fund).
- Bakker, Bas, and Christoph Klingen, 2012, “How Emerging Europe Came Through the 2008/09 Crisis: An Account by the Staff of the IMF's European Department” (Washington: International Monetary Fund).
- Bayoumi, Tamim, Richard Harmsen, and Jarkko Turunen, 2011, “Euro Area Export Performance and Competitiveness,” IMF Working Paper, WP/11/140 (Washington: International Monetary Fund).
- Bems, Rudolph, and Robert Johnson, 2012, “Value-Added Exchange Rates,” NBER WP 18498 (Cambridge, Massachusetts: National Bureau of Economic Research).
- Berger, Helge and Volker Nitsch, 2010, “The Euro’s Effect on Trade Imbalances,” IMF Working Paper, WP/10/226 (Washington: International Monetary Fund).
- Chen, Ruo, Gian-Maria Milesi-Ferretti, and Thiery Tressel, 2012, “External Imbalances in the Euro Area,” IMF WP No. 12/236 (Washington: International Monetary Fund).
- Gaulier, Guillaume, and Vincent Vicard, 2012, “Current Account Imbalances in the Euro Area: Competitiveness or Demand Shock,” Bank of France Quarterly Selection of Articles No. 27.
- Holinski, Nils, Clemens Kool, and Joan Muysken, 2012, “Persistent Macroeconomic Imbalances in the Euro Area: Causes and Consequences,” Federal Reserve Bank of St. Louis Review, January/February 2012.
- Ivanova, Anna, 2012, “Current Account Imbalances: Can Structural Policies Make a Difference?” IMF Working Paper, WP/12/61 (Washington: International Monetary Fund).
- Jaumotte, Florence, and Piyaporn Sodsriwiboon, 2010, “Current Account Imbalances in the Southern Euro Area,” IMF Working Paper, WP/10/139 (Washington: International Monetary Fund).
- Kang, Joong Shik, and Jay C. Shambaugh, 2013, “Progress Toward Internal Devaluation in the Euro Area Periphery and the Baltics,” manuscript (Washington: International Monetary Fund).
- Lane, Philip, and Barbara Pels, 2012, “Current Account Imbalances in Europe,” CEPR Discussion Paper No. DP8958.
- Nkusu, Mwanza, 2013, “Boosting Competitiveness to Grow Out of Debt—Can Ireland Find a Way Back to Its Future?” IMF WP 13/35 (Washington: International Monetary Fund).
- Shambaugh, Jay, 2012, “The Euro’s Three Crises,” Brookings Papers on Economic Activity, Spring 2012, pp 157–211.

### Appendix. Merchandise Export Market Share — key series (in percent)
- Table coverage: Merchandise Export Market Shares (in percent) by destination group and year for 1995–2007.
- Countries covered in the excerpt: Greece, Ireland, Portugal, Spain, Estonia, Latvia, Lithuania.
- Selected exact series end-points and start-points (World market share, 1995 and 2007) as reported:
  - Greece — World 0.213 (1995); World 0.165 (2007).
  - Ireland — World 0.847 (1995); World 0.849 (2007).
  - Portugal — World 0.450 (1995); World 0.367 (2007).
  - Spain — World 1.781 (1995); World 1.761 (2007).
  - Estonia — World 0.036 (1995); World 0.077 (2007).
  - Latvia — World 0.025 (1995); World 0.058 (2007).
  - Lithuania — World 0.053 (1995); World 0.120 (2007).
- Regional breakdowns included for each country (examples of region labels used in the table): Advanced Economies; Euro Area; Other Advanced; Emerging and Developing Economies; Developing Asia; Europe; Middle East and North Africa; Sub-Saharan Africa; Western Hemisphere.
- Data sources as reported in the table caption: IMF, Direction of Trade Statistics; and IMF staff estimates.

*Content unit: _wp13169 - References; Source PDF filename: _wp13169 - References*

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