current strongaccountstrong imbalances in the euro area - iza.pdf

Current Account Imbalances in the Euro Area Alan Ahearne Bruegel, Brussels and National University of Galway, Ireland Birgit Schmitz University of Bonn Jürgen von Hagen Bruegel, Brussels, University of Bonn, Indiana University, and CEPR November 2008 Abstract The dispersion in current account balances among countries in the euro area has widened markedly over the past decade-and-a-half, and especially since 1999. We decompose current account positions for euro area countries into intra-euro-area balances and extra-euro-area balances and examine the determinants of these balances. Regarding intra-euro-area balances, we present evidence that capital tends to flow from high-income euro area economies to low-income euro area economies. These flows have increased since the creation of the single currency in Europe. The authors thank Narcissa Balta, Kristin Langwasser, Ina Drepper and Marcel Förster for excellent research assistance. Emails: alan.ahearne@bruegel.org, birgit.schmitz@uni-bonn.de, vonhagen@uni-bonn.de 1. Introduction The observation of rising and persistent global imbalances has been the focus of lively debate among policymakers and academic economists in recent years. Most of that debate has concentrated on the large U.S. current account deficit and its main counterpart, the large current account surpluses of countries in Asia. Europe has not attracted much attention in this debate, most likely because European countries and the European Union as a whole have a long tradition of keeping their current accounts relatively close to balance (see