|
| | N°
2004-07 |
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| July 2004 |
| Current Accounts Dynamics in new
EU members: Sustainability and Policy Issues |
| Paolo Zanghieri | |
Most of the new EU members show large and persistent current account deficit. If on the
one side such a phenomenon is explained by catching up, on the other hand recent
experiences in emerging markets show that wide imbalances can trigger balance of
payment and currency crises. Therefore current account sustainability is becoming a key
policy issue for these countries, especially given their willingness to adopt the Euro within
a few years. There is not a unanimous way to assess whether a current account deficit is
sustainable and each method has serious drawbacks.
In this paper the issue of current account sustainability for new members is tackled under
different angles. First of all a simple accounting framework based on assumptions on long
term growth, real interest and exchange rates, and capital inflows are considered. Then as
an alternative, a simple theoretical model of current account determination under borrowing
constraints is developed and used as basis for an empirical estimation of the determinants of
the current account. The results are then used to project the evolution of external debt in
the medium run. The main conclusions reached are the following:
• Overall, current account balances do not seem to be unsustainable, as the strong growth
potential insures solvability;
• However Foreign Direct Investment plays a crucial role, making the maintenance of
large inflows a key political priority;
• The conduct of prudent fiscal policy is crucial in order to maintain the external
balances at a manageable level;
• The choice of when to join the Eurozone and how to manage the exchange rate during
the transition period should be made taking the level of the external deficit into
account. Preference should be given to regimes that let real adjustment play fully. |
Abstract | | | |
| Current account; new open macroeconomics;
panel methods; transition economies |
Keywords |
| F32; F33; F41; P2 |
JEL classification |
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