In light of the shortcomings of the Stability and Growth Pact, there has been a recognition that a surveillance framework is needed which goes beyond fiscal issues to cover wider macroeconomic factors. The question arises whether the surveillance and connected reform criteria should be applied symmetrically, to all members of the eurozone, or whether they should specifically target countries with current account deficits. Show
Economic divergences in the euro area have been the focus of intense academic and policy oriented debates.1 This article joins this discussion – against the background of important policy reforms which are underway. Particularly in the framework of the new macroeconomic surveillance mechanism for reducing and avoiding imbalances in the EU, the question has arisen whether the EU should impose more discipline symmetrically, on deficit and surplus countries alike, or asymmetrically, mainly on deficit countries. Therefore, it is important to understand the main reasons for the huge economic divergences within EMU. It will be argued that developments in Greece, Portugal and Spain themselves largely explain the huge build-up of current account deficits and foreign debts in these economies.2 The analysis is framed in an intertemporal view of current account balances.3 Accordingly, current account deficits can be fundamentally justified if the (simultaneous) net capital inflows are used to foster growth and export capacities, so that in the future current account surpluses can be sustained and the formerly incurred debts can be repaid. Such a scenario is particularly relevant for poorer countries that tend to converge in economic terms towards richer countries. In contrast, when countries with sustained current account deficits increase consumption as a reaction to capital inflows and neglect to foster their export basis, debt sustainability can be at risk due to notoriously increasing net foreign debt positions. Therefore, the leading question of this article is how the three countries examined here have utilised low interest rates and high net capital inflows: mainly for investment or for consumption? This analysis portrays current account balances from several perspectives (trade-income balance, absorption-production balance, savings-investment balance, borrowing-lending balance).4 All these different views are interconnected: CA = X - M + Inc + CurTr (trade-income balance) (1) X - M = GDP – A (with A = C + I) (absorption-production balance) (2) CA = S - I (savings-investment balance) (3) NBL = CA + CapTr (borrowing-lending balance) (4) with
Looking at the economic imbalances from these different angles5 renders it possible to deduce meaningful insights for the policy debate.6 In a first step, the analysis focuses on the economy as a whole and later also on individual sectors (government, corporations, households). The focus is laid on the period 1999 to 2007, as from 2008 onwards the impact of the financial crisis could be felt. From 1999 to 2007 the current account deficits in the three countries increased, culminating in Spain and reaching near climaxes in Greece and Portugal. Trade-Income Balance: Excessive Wage and Price IncreasesA brief look at the trade-income balance (equation (1)) clearly shows that a large share of the current account deficits can be explained by a self-inflicted loss of competitiveness due to rapidly and excessively increasing labour costs and export prices. Competitiveness is less important for the balance of primary incomes (Inc) and current transfers (CurTr), but highly relevant for the trade component (X - M) in equation (1), as a loss in competitiveness tends to impede exports and foster import growth. Therefore, it is important to ask what role the trade component plays for the current account deficit CA. In fact, negative net exports of goods and services – which only to a rather limited extent result from trade with Germany7 – account for the bulk of the current account deficit in the depicted countries in 2007. In Spain about two thirds, and in Portugal and Greece nearly four fifths, of the overall deficit result from the trade deficit (Figure 1). Within this balance, highly negative net exports of goods are only partially compensated by positive net exports of services which are largely related to trade in travel services (and in Greece also to a large extent to trade in sea freight transport). Figure 1 |