CEPII, Recherche et Expertise sur l'economie mondiale
Current Account Balances’ Divergence in the Euro Area: an Appraisal of the Underlying Forces


Emmanuelle Faure
Carl Grekou
Valérie Mignon

 Highlights :
  • Real macroeconomic convergence has failed in the eurozone.
  • Price and cost competitiveness, as well as fiscal balances, have participated in the growing macroeconomic divergence across eurozone countries.
  • Fiscal redistribution and investment at the euro area level could help achieve macroeconomic convergence and reduce current accounts’ divergence in the zone.

 Abstract :
This paper revisits the crucial issue of current account imbalances and focuses on the determinants of their gaps between eurozone Member States. We conduct robust estimations of the current account balances for a panel of ten founding euro area economies and construct a measure that allows us to diagnose why some countries have started to diverge from the eurozone mean in the last two decades. Our findings show evidence of remaining differences in countries’ economic development, meaning that real macroeconomic convergence has failed in the zone. Price and cost competitiveness, as well as fiscal balances, have also participated in this growing macroeconomic divergence. Overall, while the European authorities cannot influence the part of the current account gaps due to demographic factors, the role of fiscal redistribution and investment at the euro area level could help achieve macroeconomic convergence and thus reduce current accounts’ divergence in the zone.


 Keywords : Current Account | Global Imbalances | Eurozone

 JEL : F32, O52, C33
CEPII Working Paper
N°2022-12, December 2022

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 Fields of expertise

Money & Finance
Europe
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