The Sustainability of External Imbalances in the European Periphery

Abstract

The issue of external imbalances has become a key concern in the global economy, gaining particular prominence also inside Europe, following the Eurozone crisis. Comparatively, however, evidence for the European periphery is much less developed. In this study we investigate the sustainability of external imbalances in 15 countries from the EU's so-called eastern and super-periphery across a range of sustainability tests. We find that external imbalances are on the whole large and, despite some significant adjustments in the post-crisis period, they continue to follow paths that are possibly unsustainable. Our results show a higher likelihood of confirming sustainability when looking separately at the current account and the net foreign asset position than when looking jointly at the current and capital accounts (and thus at the intertemporal budget constraint -Bohn, 2007). This suggests, albeit tentatively, problems and vulnerabilities that go beyond simple concerns about price competitiveness and the trade performance of the countries under study.

Analyzing the Impact of Foreign Capital Inflows on the Current Account Balance in Developing Economies: A Panel Data Approach

“…Evaluating the current account requires the use of appropriate equilibrium values or norms, which also aid in anticipating future adjustment needs and potential dynamics of economic fundamentals (Comunale, 2015). Several studies, including those by Shfferin and Woo (1990), Obstfeld and Rogoff (1995), Otto and Voss (1995), Bergin (2006) Monastiriotis and Tunali (2020), have identified key determinants of current account deficits. However, none of these studies have explored the relationship between foreign capital inflow and the determinants of current account deficits in developing countries.…”

“…Through an extensive review of the literature, it becomes evident that the current account deficit is a subject of interest among researchers and policymakers. Various studies (Comunale, 2015 Monastiriotis and Tunali, 2020) have identified key factors influencing the current account deficit. However, none of these studies have explored the connection between foreign capital inflow and the determination of the current account deficit specifically in developing countries.…”