External Imbalances in the Euro Area

51 Pages Posted: 11 May 2013

See all articles by Ruo Chen

Ruo Chen

International Monetary Fund (IMF)

Gian Maria Milesi-Ferretti

International Monetary Fund (IMF); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Thierry Tressel

International Monetary Fund (IMF) - Research Department

Date Written: September 2012

Abstract

The paper examines the extent to which current account imbalances of euro area countries are related to intra-euro area factors and to external trade shocks. We argue that the traditional explanations for the rising imbalances are correct, but are incomplete. We uncover a large impact of declines in export competitiveness and asymmetric trade developments vis-à-vis the rest of the world –in particular vis-à-vis China, Central and Eastern Europe, and oil exporters- on the external balance of euro area debtor countries. While current account imbalances of euro area deficit countries vis-à-vis the rest of the world increased, they were financed mostly by intra-euro area capital inflows (in particular by the purchase of government and financial institutions’ securities, and cross-border interbank lending) which permitted external imbalances to grow over time.

Keywords: Capital inflows, Current account deficits, Debtor countries, Economic integration, Europe, European Economic and Monetary Union, Exchange rate appreciation, Export competitiveness, External debt, External shocks, Real effective exchange rates, Terms of trade, euro area, external imbalances, financial integration, terms of trade shocks., trading partner, trading partners, commodity exporters, domestic demand, oil exporters, oil prices, export performance, domestic investment, impact of trade, trade deficits, tradable goods, external financing, domestic prices, world trade, trade performance, bilateral imports, export prices, bilateral trade, export shares, balance of payments, exporting count

JEL Classification: E02, F14, F30, F41, F43, O52

Suggested Citation

Chen, Ruo and Milesi-Ferretti, Gian Maria and Tressel, Thierry, External Imbalances in the Euro Area (September 2012). IMF Working Paper No. 12/236. Available at SSRN: https://ssrn.com/abstract=2263581

Ruo Chen

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Gian Maria Milesi-Ferretti

International Monetary Fund (IMF) ( email )

700 19th Street NW
Room 9-700
Washington, DC 20431
United States
202-623-7441 (Phone)
202-589-7441 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Thierry Tressel

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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