Sustainability of Current Account Surpluses: Evidence from European Countries

Abstract

Over the last two decades, the current accounts in the European Union (EU) have diverged substantially. This divergence has raised concerns about the sustainability of the core countries' current account surpluses since the peripheral countries' financing of their significantly rising levels of current deficits depends on them. In this study, by applying both linear and nonlinear unit root tests and taking into account structural breaks in the datagenerating process, we examine the current account sustainability of the main core countries with large external surpluses. We find that the current accounts of Austria, Denmark and Germany are not on sustainable paths, which suggests that the core economies might not continue to run surpluses to finance the peripheral countries' external deficits. The results of this study imply that the policymakers in peripheral countries might take proactive measures against possible borrowing problems and capital outflow risk in the future.

Has COVID-19 pandemic crisis changed the EU convergence patterns?

“…Worthy of noting is the fact that those bigger differences in 2020 were followed by a low average current-account surplus, which was a result of recording the surpluses in 17 out of the 27 EU countries in 2020, those surpluses being especially high in Denmark, Germany, Lithuania, Malta, and the Netherlands. Although Sivrikaya and Kurul (2020) predicted that Austria, Denmark and Germany would not continue to record surpluses, those countries recorded surpluses in 2020. Due to the lockdown, the closing of the borders and the other anti-pandemic measures, most of those surpluses were recorded as a result of the trade balance surplus, while services did not contribute to the surpluses as they had in previous years (Eurostat, 2020).…”