Michel Carlo Nies

Master in Economics 2013/2014

Barcelona Graduate School of Economics

1. INTRODUCTION

2. THE CURRENT ACCOUNT

3. EMPIRICAL ANALYSIS

4. POLICY RECOMMENDATIONS

Background: The European sovereign debt crisis

Apart from Greece, most crisis countries displayed moderate levels of sovereign debt

0,0

20,0

40,0

60,0

80,0

100,0

120,0

140,0

160,0

180,0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Per

cen

t o

f G

DP

Gross government debt

Germany

Ireland

Greece

Spain

Cyprus

Netherlands

Portugal

-17,0

-12,0

-7,0

-2,0

3,0

8,0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Per

cen

t o

f G

DP

Current account balance

Germany

Ireland

Greece

Spain

Cyprus

Netherlands

Portugal

Sovereign debt rather a consequence than the initial cause

But current accounts exhibited divergent developments for an extended period of time

Problematic since current accounts are mirrored by the financial account

Pitchford thesis: current account deficits are only dangerous if driven by the public sector. This statement appears not valid for Europe.

Current account surpluses are not desirable either

Research question: what determines current account positions in Europe?

Two different, but equivalent ways to define the current account

CA = Trade Balance + Net foreign income + Net current transfers

CA = Savings – Investment

Differences in competitiveness:

- unit labour costs

- administration

- infrastructure

- corruption, etc.

Failure of financial markets: - allowing over borrowing

- consistently funding bad investments

Standard approach panel data with year fixed effects

Here: also country fixed effects

Dependent variables: Current account balance, Trade balance

Variables taken from the literature: Government balance, Dependency ratio, GDP growth

New variables: Adjusted wage share, share of investment in tradable industries (four lags), Corruption Perception Index

Dataset: 28 countries from 1995 to 2012

VARIABLES 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑐𝑐𝑜𝑢𝑛𝑡

𝐺𝐷𝑃

𝐸𝑥𝑝𝑜𝑟𝑡𝑠 − 𝐼𝑚𝑝𝑜𝑟𝑡𝑠

𝐺𝐷𝑃

Wage share -0.2165*** -0.2878***

Government balance 0.2261*** 0.1169*

Invest. in tradable, lag 1 0.0516 0.1014**

CPI 0.8756* 0.4525

Dependency ratio 0.4525*** 0.3577***

Real GDP growth -0.5590*** -0.5299***

Cross country differences explained by the variation in regressors

Adjusted wage share: 5 percentage points (CA balance) and 6 percentage points (trade balance)

Government balance : 4 percentage points (CA balance), and 2 percentage points (trade balance)

Investment share in tradable industries: above 4 percentage points (trade balance)

CPI: 5 percentage points (CA balance)

Turn around diverging trend in unit labour costs

Two options:

1. Radical labour market reforms

Risk: deflation

2. Higher inflation in the North of Europe

Risk: overall loss of competitiveness

Maybe a hybrid of both?

Increasing investors liability (more skin in the game)

Lending restrictions for certain activities (construction, consumption, …)

Fighting corruption

Change industrial structure

QUESTIONS

HAVE A NICE HOLIDAY AND GOOD LUCK FOR THE FUTURE!