Current Account Deficits in European Emerging Markets

Abstract

Many of the emerging market economies in Europe are presently running current account deficits which are quite high relative to any global or historical standard and are fundamentally unsustainable. This includes the three poorer European Union (EU) members of the old Europe (Greece, Portugal, and Spain), many of the EU's new member states (largely the former transition economies which have joined since 2004), most of those non-EU members in south-east Europe, and a number of the CIS economies in eastern Europe and the Caucasus. The unweighted average current account deficit for this group has more than doubled from under four percent of GDP in 2003 to well over eight percent in 2007. This trend is significantly different than what has evolved in many of the world's other emerging markets; these other economies have generally been running current account surpluses. This paper documents this development, describes the underlying factors that have brought it about, assesses the underlying vulnerability that has been created, and discusses the implications of this development for other emerging markets and global financial stability more generally. In addition, how these risks have evolved since the appearance of the global credit crisis beginning in the summer of 2007 is examined.

From Indecision to Fast-Track Privatisations: Can Greece Still do it?

“…If such borrowing cost-mitigating measures are decided upon, the optimistic scenarios of higher growth and privatisations could become realistic alternatives to the gloomy predictions of failure, default and collapse that are increasingly used to describe present day Greece. For an interesting discussion of the effects of the credit crunch on emerging markets with large current account deficits see Shelburne (2008). 5 Similar studies for different periods include, amongst others, Alexopoulou et al (2009), Attinasi et al (2009), and Barrios et al (2009).…”

The nexus between the fear of floating and expenditures witching external adjustment mechanism: emerging European and Latin American floaters

“…A positive output gap tends to increase just before the Great Recession as a sign of unsustainable economic boom (Allegret, Sallenave 2015; Janković 2019). However, the overheating of emerging European economies was mostly financed with foreign capital resulting in an unsustainable current account position in contrast to the self-financing of economic growth in other emerging countries resulting in a stable current account position (Rahman 2008;Shelburne 2008). As a consequence, painful internal devaluation was in most cases unavoidable, as a sign of expenditurereducing adjustment mechanism under crisis-driven external shocks (Kang, Shambaugh 2014).…”

Monetary Challenges of Emerging European Economies Towards the Euro Zone

“…Moreover, when market participants pay attention to the growing current account deficits, the side effect of large capital inflows (as a signal of vulnerability and possible overvaluation) can create their own demise. The vulnerability of EEEs to the sudden stop episodes has been revealed, and especially in the period of the Global crisis since 2008 (Rahman, 2008;Shelburne, 2008;Vamvakidis, 2008;Allegret & Sallenave, 2015). Figure 7 shows that (i) in average, foreign direct investments (FDI) and portfolio inflows (PI) in EEEs are far lower from the euro zone level (left panel); (ii) in general, FDI capital inflows in EEEs dominate over the variable portfolio investments in the observed period 2000-2017 (right panel); (iii) the capital surge in the precrisis period is evident as a vulnerability grounds for sudden stop problems in EEEs (right panel); (iv) the abrupt FDI drop and milder drop of portfolio investments happened under the crisis impact in EEEs, as well as the euro zone (right panel).…”