Abstract
The crucial role of current account imbalances (CAI) is widely acknowledged in the consensus narrative of the European crisis that followed the Great Recession. On the basis of this interpretation, CAI play a prominent role in the EU Macroeconomic Imbalances Procedure (MIP), which broadens the EU economic governance framework to include the surveillance of unsustainable macroeconomic trends. Although the widening of the CAI in the Euro Area before the crisis is a matter of fact, and the consensus narrative contains elements of truth, alternative views have been put forward on three main issues: (i) the relevance of CAI, (ii) their causes and connection with the crisis, and (iii) their policy implications. The aim of this paper is to examine these controversial points about the causes, meaning and consequences of CAI, and discuss the alternative policy prescriptions that emerge.
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Source: elaborations on Eurostat database AMECO
Source: elaborations on Eurostat, AMECO database
Source: elaborations on Eurostat, AMECO database
Source: elaborations on Eurostat, AMECO database
Source: elaborations on Eurostat, AMECO database
Source: elaborations on Eurostat, AMECO database
Source: Amici et al. (2018) and elaborations on Eurostat, AMECO database
Source: elaboration on Chen et al. (2013), Table 1
Source: Lane (2013), p. 52
Source: elaborations on Eurostat, AMECO database
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Notes
Article 2(1) of Regulation No 1176/2011 defines an imbalance as “any trend giving rise to macroeconomic developments which are adversely affecting, or have the potential adversely to affect, the proper functioning of the economy of a Member State or of the Economic and Monetary Union, or of the Union as a whole”. Additional clarity is given in the Commission compendium, where it is specified that “the main rationale for a supranational surveillance mandate builds on the fact that macroeconomic imbalances in one country have relevance also for other Member States”. Therefore, “the analysis concerns primarily country specific issues, but implications for the euro area and the EU need also to be addressed” (European Commission, 2016).
As a matter of fact, this view goes back to earlier stages of world-wide industrial development and the involvement of developing countries, as, for instance, in the debate about the "big-push" theory.
The definition provided by the OECD (1992) is very similar. Economic competitiveness is defined as “the degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term”. In other words, competitiveness can be assessed as the ability of a country to operate in a competitive environment whilst maintaining an internal balance, namely the standard of living of its population (de Vet, 1993).
Disaggregated data for the sole EA are not available.
Not only for the EA countries. Empirical research across industrialised countries and the United States finding a poor relationship between price indexes and CAI goes back to Rose (1991), and Bachman (1992). More recent work by Bahmani-Oskooee and Kara (2003) using cointegration models for several industrialised countries finds weak and unsystematic relationships.
During the run-up of the CAI, export prices were increasing slightly slower in the deficit region.
From birth (1999) to the eve of the world crisis (2008), the euro appreciated by some 30% against the dollar. The exchange rate has never been an official target for the ECB, nonetheless the depreciation of about 20% that accompanied the quantitative easing programmes after 2014 was a welcomed contribution to the reflation of the EA.
This has been the case for foreign holders of the Greek sovereign debt since the initial haircut.
See Die Presse, "Euro ist in Explosion begriffen", April 19, 2012. The same episode is also reported by two German economists, Finn Marten Körner and Hans-Michael Trautwein, in chapter 10, p.1, in The Political Economy of the Eurozone, edited by Ivano Cardinale, O'Maris Coffman, and Roberto Scazzieri, Cambridge University Press.
Eurostat definitions.
In the intertemporal model à la Obstfeld and Rogoff one instead has that capitals and goods flow from the net saver ("patient") country to the net consumer ("impatient") one.
Not by chance, the supply of euros for each country and the system as a whole is neither finite nor inelastic like gold, unless the ECB so wishes. Greece loses euros towards Germany, say because the Greek banks are unable to recover euro reserves from the German banks, to the extent that the ECB refrains from increasing the total money supply, that is, it does not lend specifically to the Greek banks.
A brief introduction to the Target 2 system can be found in ECB (2011b, pp. 35-ff.). Severe criticisms and complaints against the management of Target 2 as "the ECB's stealth bailout" have been raised by Sinn (e.g. 2011). However, they have been rebutted by several scholars (e.g. Bindseil and König 2011, De Grauwe and Ji 2012).
"The scale of current account adjustment would surely have been larger in the absence of cross-border ESCB liquidity flows (as reflected in Target 2 balances) and official EU/IMF funding to Greece, Ireland and Portugal […] Large official gross flows also allowed private-sector foreign investors in creditor countries to exit from positions in the high-deficit countries by declining to rollover expiring claims. In the absence of large-scale official flows, foreign investors would plausibly have incurred larger valuation losses through sharper declines in asset values and more extensive debt writedowns" (Lane, 2013, pp. 21–22).
The initial scoreboard used by the Commission had the same 4% trigger point for the CAI, whether this was a surplus or a deficit. However, this was later changed into an asymmetric trigger (De Grauwe, 2012).
"To come out of the crisis, the [deficit countries] now need to depreciate in real terms, i.e. reduce wages and prices relative to their trading partners, a painful process that requires harsh austerity programs" (Sinn 2011, our italics).
In November 2016, the European Commission proposed waiving the application of own funds and liquidity requirements where the same competent authority supervises parents and subsidiaries established in different Member States participating in the Banking Union. Although the European Parliament had expressed its support for this proposal, in the final text agreed in December 2018 this provision was deleted due to the firm opposition of the majority of Member States.
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Acknowledgements
An earlier version of this paper was presented at the EconPol Europe, Foundation Conference, Brussels, 9-10 November 2017. We would like to thank, without any implication, Adolfo Barbera del Rosal, Lorenzo Codogno, Kajus Hagelstam, Simone Macchi, Dario Paternoster, Alice Zoppè for valuable comments and suggestions.
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Mazzocchi, R., Tamborini, R. Current account imbalances and the Euro Area. Controversies and policy lessons. Econ Polit 38, 203–234 (2021). https://doi.org/10.1007/s40888-021-00214-y
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DOI: https://doi.org/10.1007/s40888-021-00214-y