DP8958 Current Account Imbalances in Europe

Author(s):	Philip R. Lane, Barbara Pels
Publication Date:	May 2012
Keyword(s):	current account, EMU, Europe
JEL(s):	E63, F41
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=8958

The European crisis is partly attributable to the sharp increase in external imbalances across Europe during the pre-crisis period. We examine current account imbalances in Europe over 1995-2007, together with the underlying saving and investment rates (and their subcomponents). We find that the discrete expansion in current account imbalances during the 2002-2007 period can be attributed to a strengthening in the link between growth forecasts and current account balances. A striking pattern was that greater optimism about future growth was associated with lower savings and higher construction investment, rather than investment in productive capital.