Current account deficits in the European Economic and Monetary Union and the international financial crisis

Abstract

The European Monetary Union (EMU) has transformed the traditional role that the current account balance has played as a key factor to guarantee long-term economic growth. The removal of exchange rate risk and an improved access to international financial markets have generated a sharp increase in current account deficits. Since the mid-1990s, and especially after the adoption of the euro in January 1999, we have witnessed a significant increase in the dispersion levels of the current account imbalances of EMU countries. The current account deficits exhibited by Greece, Portugal and Spain are partially the cause of the aforementioned dispersion. These deficits could be interpreted as a positive result of the integration process. However, the size of the deficits together with their persistence through time has resulted in a fast worsening of the international investment position that calls for adjustment. This paper examines the evolution of the EMU current account imbalances, their relation to the monetary integration process registered after the introduction of the euro, and the special impact that the international financial crisis is having on countries with high current account deficits.