Why the current account may matter in a monetary union: Lessons from the financial crisis in the Euro area

Luigi Spaventa and Francesco Giavazzi ()

No 8008, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The current account has always been a neglected variable in the management of the Euro area and in the assessment of its members' performance; so has, as a consequence, the savings-investment balance. This paper first reviews the arguments that explain this attitude and justify, under some conditions and in some cases, the persistence of current account deficits. It then examines some peculiar features of the growth experience under monetary union in four Euro area countries which do not conform to the conventional convergence pattern. Models establishing the optimality of a succession of current account deficits in a catching-up process implicitly assume that the intertemporal budget constraint is satisfied, so that the accumulation of foreign liabilities is matched by future surpluses. In section 3 we first introduce explicitly this constraint in a simple two-period, two-good model and show that its fulfilment requires that growth be driven by an adequate increase of the country's production capacity of traded goods and services. By examining the composition of output and demand we show that this has not been the case in the four countries considered and argue that monetary union has helped relax the necessary discipline. The common monetary policy moreover did nothing to prevent an extraordinary growth of credit that fed the imbalances in the four countries. The paper closes addressing some policy issues related to the future sustainability o the monetray union.

Keywords: Euro; Monetray union; Traded- non-traded goods model; Current account deficts (search for similar items in EconPapers)
JEL-codes: E51 E58 F32 F34 F36 (search for similar items in EconPapers)
Date: 2010-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (148)

Downloads: (external link)
https://cepr.org/publications/DP8008 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Why the current account may matter in a monetary union. Lesson from the financial crisis in the Euro area (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:8008

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP8008

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().