Current Account Imbalances in the Euro Area Discussion by Agnès Bénassy-Quéré May 25, 2007 1
International financial integration 6 Avg abs. value of current account in % of GDP 5 4 3 2 1 0 1870-74 1880-84 1890-94 1900-04 1910-14 1920-24 1930-34 1940-44 1950-54 1960-64 1970-74 1980-84 1990-94 2000-04 Sources: Taylor (1996), FERI. Note: The capital mobility index is defined as the average of the absolute values of current accounts relative to GDP for major capital-importing and capital exporting countries. The countries include Argentina, Australia, Canada, Denmark, France, Germany, Italy, Japan, Norway, Sweden, the United Kingdom, and the United States. 2
Eurozone vs G7 International financial integration 5 4 Average absolute CA/GDP in % 3 2 1 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: IMF, CEPII. Avg Eurozone Avg G7 3
Eurozone vs G7, weighted 5 International financial integration 4 Sum of absolute CA/GDP in % 3 2 1 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Source: IMF, CEPII. SumEurozone/GDP % SumG7/GDP % 4
Current account imbalances: two views Trade view: competitiveness, demand extra Euro area Capital view: growth in an open economy intra Euro area 5
Intra: trade view insufficient 112 110 108 Relative consumer price, Spain / Germany 106 Index 1999=100 104 102 100 98 96 Relative unit labor cost, Spain / Germany 94 1999 2000 2001 2002 2003 2004 2005 Source: Eurostat. 6
Bilateral trade imbalances as a measure of financial integration Germany 100 50 Spain 100 100 50 RoW 50 Is capital flowing from Germany to Spain? 7
Capital flows consistent with bilateral trade imbalances Germany 50 100 Spain 50 50 100 RoW 100 8
And also Germany 500 1000 Spain 500 500 1000 RoW 1000 Bottom line: (TB Spain -TB Germany ) rather than TB Spain/Germany Or direct measure of bilateral flows (FDI?) 9
The Data Service exports? Part des services dans les exportations et les importations totales (%) Exportations Importations 1980 2003 1980 2003 France 28 22 20 18 Allemagne 14 14 18 23 Royaume-Uni 24 32 20 25 Etats-Unis 18 33 15 18 Source : CEPII, CHELEM-BAL-CIN. TBint ra = 0? 10
TBint ra = f Intra-EU trade balances ( DummyEMU, GDPcap, GDPcap* EMU, FiscalBal, Oil, REER) Questions Theory Intertemporal approach? not bilateral. Why not TB-TB*? Productivity? Trade approach? output gap, growth differential, exports/imports. Econometric methodology Fixed effects? Reverse causality (RER)? Interpretation EMU dummy? 11
The Feldstein-Horioka Puzzle Pooled estimation? Correlation should be even lower for private saving and investment SGP constraints public saving to more or less equalize public investment 12
TB extra Extra-EU trade balances / GDP = f US ( TB( 1), ln( GDP / GDP*), ln REER) Questions Theory Trade approach. Output gaps? exports/imports. Why not the same approach as for intra-eurozone trade? Econometric methodology Dependent variable in % of US GDP: not comparable from one country to another. Seasonal adjustment? Year-on-year? Reverse causality (REER)? e.g. France Interpretation Germany=only country where TB reacts to exchange rate? 13
Should we look at intra-euro imbalances? YES. Example: 2005 6 4 2 0-2 -4-6 -8 Germany Restrictive Expansionary Spain Long run real int. Rate Current account Cyclically-adjusted fiscal balance Potential/effective GDP Productivity shock? DSGE modelling 14
The lack of fiscal policy at the euro area level Politique budgétaire pro-cyclique en zone euro, contra-cyclique aux Etats-Unis Variation du solde budgétaire primaire corrigé du cycle Restriction pro-cyclique Restriction contra-cyclique 1,5 2006 0,5 2005 2007* 1999 2000-0,5 2007* 2001-1,5-2,5 2002 Expansion pro-cyclique -3,5 Expansion contra-cyclique -2,0-1,5-1,0-0,5 0,0 0,5 1,0 1,5 2,0 Ecart de production Source : OCDE, Perspectives Economiques n 80, 2006. * 15