Current Account Imbalances in the Southern Euro Area

IMF Working Papers, June 1, 2010

Source details

The paper examines the causes, consequences, and potential cures of the large current account deficits in the Southern Euro Area (SEA).
These deficits were mostly driven by a decline in private saving rates.
The European Monetary Union and the Euro 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.
Although the global financial crisis has started to force some unwinding, the current account deficits are expected to remain high in the medium run, 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.

Decline in private saving rates is identified as the primary driver of large current account deficits in the SEA.
The European Monetary Union and adoption of the Euro improved these countries’ access to international saving, enabling higher investment rates and larger current account deficits than would otherwise have been sustained.

Deficits in SEA in 2008 exceeded what fundamentals would predict, but this overstatement varies substantially across countries.
The paper highlights heterogeneity across SEA countries in both the size of deficits and the extent to which they deviate from fundamentals.

The global financial crisis initiated partial unwinding of the deficits.
Current account deficits are expected to remain high in the medium run, with substantial cross-country variation.

Large external deficits pose risks to economies in the Southern Euro Area, even within a currency union.
The paper discusses policy options to reduce these deficits (policy options are discussed in the paper; specifics are not listed on the overview page).