CtCurrent AtA IblI mbalances in the SthS outhern Euro Area ...€¦ · 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008-12-10-Northern euro area,

C t A t I b l i th S th E ACurrent Account Imbalances in the Southern Euro Area: Causes, Consequences and Cures

Florence Jaumotte Piyaporn Sodsriwiboon

European DepartmentInternational Monetary FundInternational Monetary Fund

The views expressed are those of the authors and do not necessarily represent those of the IMF.

Current accounts (CA) in the Southern Euro Area (SEA) have deteriorated sharply since the mid‐1990s

Current Account Balance, % of GDP4

6

4

6

-2

0

2

-2

0

2

8

-6

-4

8

-6

-4

-12

-10

-8

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008-12

-10

-8Northern euro area, excl. LuxembourgSouthern euro area, excl. SloveniaEuro area excl. Luxemburg and Slovenia, weighted averageItaly

2

Source: IFS statistics, IMF Staff Calculations

PlanPlan

What explains the growing current account deficits in Southern Euro countries?

Are the current account deficits excessive?

Policy options in a currency union?

Conclusions

3

What explains the growing current account deficits in Southern Euro countries?Southern Euro countries?

1 Stylized facts1. Stylized facts

4

CA declines were accompanied by a large fall in saving and a modest rise in investment

Changes in Saving-Investment2005-2008 vs 1994-1997(Percent of GDP)

4

6

8

10SEA

22.3

22.324.4

20

25

30

-2

0

2

4

14.4

5

10

15Current account balance

Domestic saving

Domestic investment

10

-8

-6

-4

Domestic Saving

0.2

-10

-5

0(Percent of GDP)

-12

-10

Cyprus Greece Italy Malta PortugalSlovenia Spain SEA

Domestic Investment-9.9

-151994 1996 1998 2000 2002 2004 2006 2008


5

Saving rates in SEA have been diverging from levels in NEA

Domestic Saving(Percent of GDP)

25

30

35Domestic Investment(Percent of GDP)

25

30

35

15

20

25

15

20

25

5

10

NEA Cyprus Greece ItalyMalta PortugalSlovenia Spain

5

10

NEA Cyprus Greece ItalyMalta PortugalSlovenia Spain


01994 1996 1998 2000 2002 2004 2006 2008

Slovenia SpainSEA

01994 1996 1998 2000 2002 2004 2006 2008

Slovenia SpainSEA

6

The decline in saving rates reflected private saving, with public saving actually improving or stable

Changes in Domestic Saving, 2005-2008 vs 1994-1997(Percent of GDP)

5

10SEA

23.720

25

30

5

013.5

5

10

15Current account balance

Private Saving

Public saving (P t f GDP)

-10

-5

Private Saving

0.20.9

-1.4

-10

-5

0

(Percent of GDP)

-15Cyprus Greece Italy Malta PortugalSlovenia Spain SEA

Public Saving


-9.9

-15

10

1994 1996 1998 2000 2002 2004 2006 2008

7

The modest increase in investment was also due to the private sector, but concentrated in a few countries

SEA

18.8

17.215

20

25

Current account balance

Changes in Investment, 2004-2007 vs 1994-1997(Percent of GDP)

4

6

8

3.3 3.35

10

Current account balance

Public Investment

Private Investment (Percent of GDP)

0

2

4

9 9

0.2

-10

-5

0

-4

-2

Public InvestmentP i I-9.9

-151994 1996 1998 2000 2002 2004 2006 2008


-6Cyprus Greece Italy Malta PortugalSlovenia Spain SEA

Private Investment

8

Investment rates increased mostly in the construction sector, which may not be as productive

Changes in Investment in Constructionfrom avg 1995-1998 5.5

1.3

Spain

SEA

Changes in Investment in Machinery 2.4

-0.1

Spain

SEA

from avg. 1995-1998to avg. 2005-2008(Percent of GDP)

-1.9

2.8

Portugal

Slovenia

pfrom avg. 1995-1998to avg. 2005-2008(Percent of GDP)

-0.5

1.1

Portugal

Slovenia

p

2 0

1.5

-0.6

G

Italy

Malta

0 4

0.4

-3.2

G

Italy

Malta

2.5

-2.0

-6 -4 -2 0 2 4 6

Cyprus

Greece

-0.1

0.4

-6 -4 -2 0 2 4 6

Cyprus

Greece

9


The CA deficits were heavily financed with debt instead of FDI inflows

Net Other Investment, Avg. 2000-2008

30SEA current account balance,average from 2000 to 2008

12Net Portfolio Investment, Avg 2000-2008

30

Avg. 2000 2008

0

10

20g

(Percent of GDP)

0

4

8Avg. 2000 2008

0

10

20

-20

-10OthersDepositsLoansTrade credits

-8

-4Current Account BalanceFDIPortfolio/Other InvestmentReserve Assets

-20

-10

Money marketBonds

-30Cyprus Greece Italy Malta PortugalSlovenia Spain


-12Cyprus Greece Italy Malta PortugalSloveniaSpain SEA

Reserve Assets-30

Cyprus Greece Italy Malta PortugalSlovenia Spain

Equities

10

Negative net income flows are already exerting strong pressure on the CA

Due to the large negative international investment position, especially in Greece, Portugal and Spain

1994 2008 Difference 1994 2008 DifferenceItaly

Contributions to Current Account Deficits in 1994 and 2008SEA

1994 2008 Difference 1994 2008 DifferenceCurrent Account Balance 0.2 -9.9 -10.1 1.3 -3.2 -4.5Balance on Goods and Services -3.7 -6.3 -2.6 3.6 -0.5 -4.0Net Income 0.6 -3.8 -4.4 -1.6 -1.9 -0.3N t T f 3 3 0 1 3 1 0 7 0 8 0 1Net Transfer 3.3 0.1 -3.1 -0.7 -0.8 -0.1Primary Current Account Balance 1/ -3.9 -11.5 -7.6 n.a. -4.6 n.a.Source: IFS statistics1/ primary current account balance is current account balance net of interest payments.

11

What explains the growing current account deficits in Southern Euro countries?

1. Stylized facts2. Role of EMU

12

CA declines coincided with the creation of the EMU and and its subsequent introduction of the euro

6 6

Current account balance(Percent of GDP)

2

4

2

4

Stage two of EMU

EuroAdoption

SEA-3EMU

-2

0

-2

0

-8

-6

-4

-8

-6

-4

-12

-10

8

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008-12

-10

8NEA

SEA-4

SEA-3

Italy

13Source: IFS statistics, IMF Staff Calculations

1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

EMU may have affected CA in various waysEMU may have affected CA in various ways

Financial liberalization: External: opening the “gates” to let capital and credit flow in

Domestic: easier availability of credit boosting domestic consumptionDomestic: easier availability of credit boosting domestic consumption

Improvement in macroeconomic policies due to convergence criteria

Reduction in nominal and real interest rates reflecting reduced exchange rate risk and improved macroeconomic policies

Effects can go in opposite directionsEffects can go in opposite directions

Effects may depend on starting income level

14

SEA made substantial progress in financial liberalizationSEA made substantial progress in financial liberalization

Financial liberalization index

0.8

1.0

SEA-4NEAIt l

Capital Account Openness

2 0

2.5

3.0

SEA-4SEA-3Italy

0.6

Italy

0 5

1.0

1.5

2.0 Italy

0.2

0.4

Stage two Euro SEA 3

-0.5

0.0

0.5

Stage two of Euro SEA-3

Source: IMF Staff Calculations

0.01976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Stage two of EMU

EuroAdoption

SEA-3EMU

-1.5

-1.0

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Stage two of EMU

EuroAdoption

SEA-3EMU

15

Fiscal deficits and inflation were sharply reducedFiscal deficits and inflation were sharply reduced

2

4

6Stage two of

EMUEuro

AdoptionSEA-3EMU

14

16Stage two of

EMUEuro

AdoptionSEA-3EMU

4

-2

0

2 Inflation(Percent)

8

10

12

NEASEA-4SEA-3Italy

Fiscal Balance(Percent of GDP)

10

-8

-6

-4

NEASEA-4 2

4

6


-12

-10

1992 1994 1996 1998 2000 2002 2004 2006 2008

SEA 4SEA-3Italy

0

2

1992 1994 1996 1998 2000 2002 2004 2006 2008

16

Interest rates fell rapidly and converged to the low levels in NEA

Real interest rate, 10-year government bonds8

10Nominal interest rate, 10-year government bonds

20

25

0

2

4

6

15

20

-6

-4

-2

0

SEA-4 excl GRCNEA excl LUX & FINItaly


5

10

SEA-4 excl GRCNEA excl LUX & FINItaly


-8

-6

1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Stage two of EMU

EuroAdoption

SEA-3EMU


01976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

Stage twoof EMU

EuroAdoption

SEA-3EMU

17

What explains the growing current account deficits inWhat explains the growing current account deficits in Southern Euro countries?

1. Stylized facts2 Role of EMU2. Role of EMU

3. A quantitative analysis

18

Regression analysisRegression analysis

Standard current account regression: CA is a function of the fiscal balanceStandard current account regression: CA is a function of the fiscal balance (+), growth opportunities (‐), current dependency ratios (‐), future dependency ratios (+), initial net foreign assets (+), time dummies

See for instance Lee et al. (2008)

Augmented with financial liberalization and dummy variables forAugmented with financial liberalization and dummy variables for participation into EMU and adoption of the euro

Use of dummy variables to capture “exogenous” effect of EMU and euro adoptionadoption

Dummy variables for EMU and euro adoption are differentiated for NEA and SEA (different income levels, different accompanying policies)

=> Northern EMU, Southern EMU, Northern euro, Southern euro

19

Regression analysis (continued)Regression analysis (continued)

Repeat regression separately for saving and investment ratesRepeat regression separately for saving and investment rates

Focus on medium‐run determinants of CA (data are averaged over four‐year periods); unbalanced panel of 49 advanced and emerging economies over the period 1973‐2008

20

Main resultsFinancial liberalization weakens CA by depressing saving rate

EMU had positive impact on CA of NEA, negative insignificant impact on SEA

Euro adoption lowered CA in SEA and NEA by raising investment

D t i t f th C t A t d S i d I t t R t ( ti d) 1/

Current Account Saving Rate Investment Rate

(a) (b) (c )

Determinants of the Current Accounts and Saving and Investment Rates (continued) 1/(Percent of GDP)

Financial factors:Financial liberalization index -0.04 -0.088 -0.049

[3.58]*** [4.62]*** [2.52]**EMU and euro factors:

Northern EMU dummy variable 0.031 -0.024 -0.055[2 10]** [1 67]* [3 15]***[2.10]** [1.67]* [3.15]***

Southern EMU dummy variable -0.015 -0.002 0.012[1.19] [0.17] [1.14]

Northern euro dummy variable -0.04 0.007 0.047[2.12]** [0.36] [2.22]**

Southern euro dummy variable -0 042 -0 003 0 039Southern euro dummy variable -0.042 -0.003 0.039[2.71]*** [0.12] [2.49]**

Observations 411 409 409Adjusted R-squared 0.56 0.49 0.24Source: IMF staff calculations.1/ Robust t statistics are in parentheses; *, **, and *** denotes significance at the 10 percent, 5 percent, and 1 percent, respectively.

21

All regressions include a constant and time-fixed effects and are estimated by ordinary least squares.

Most of the decline in SEA CA is due to EMU/euro effectsMost of the decline in SEA CA is due to EMU/euro effects

Financial liberalization, demography, and initial net foreign assets alsoFinancial liberalization, demography, and initial net foreign assets also played a role, but a more limited one

Change in Current Account, 1989-92 to 2005-08 (Percent of GDP)

-8 -6 -4 -2 0 2 4 6

current account

net foreign assets

fiscal balance

growth opport.

demographydemography

oil balance

financial center

EMU/euro

financial lib.

time dummies

residual

averageeuro southaverageeuro north

22

Source: IMF Staff Calculations.

Euro adoption allowed to maintained investment higher than domestic saving would have financed

One benefit from economic integration is improved access to the international pool of saving

Financial liberalization and demography were major factors behind the drop in saving rates but also reduced investment through lower availability ofin saving rates but also reduced investment through lower availability of domestic saving

Change in Saving Rate, 1989-92 to 2005-08(P t f GDP)

Change in Investment Rate, 1989-92 to 2005-08(Percent of GDP)(Percent of GDP)

-8 -6 -4 -2 0 2 4 6

saving rate

net foreign assets

(Percent of GDP)-8 -6 -4 -2 0 2 4 6

investment rate

net foreign assets

fiscal balancefiscal balance

growth opport.

demography

oil balance

fiscal balance

growth opport.

demography

oil balance

fi i l tfinancial center

EMU/euro

financial lib.

time dummies

averageeuro southaverage

financial center

EMU/euro

financial lib.

time dummies

averageeuro southaverageeuro north

23

residual euro north residual euro north

Source: IMF Staff Calculations.


1. Evidence from real effective exchange rates (REER) and growth performanceand growth performance

24

REER of SEA appreciated by 10 15 percent since 1999REER of SEA appreciated by 10‐15 percent since 1999

130

REER (1999=100),HICP Deflator

115

120

125

130

NEASEA-4SEA-3Italy

REER (1999=100),Price DeflatorGDP at Market Prices

115

120

125

130

NEASEA-4SEA-3Italy

100

105

110

115

100

105

110

85

90

95

85

90

95

801994 1996 1998 2000 2002 2004 2006 2008

Source: European Commission, IMF Staff Calculations

801994 1996 1998 2000 2002 2004 2006 2008

25

Unit labor cost based REER show an even more serious appreciation of about 25 percent

REER (1999=100),Nominal Unit Labor Costsin Manufacturing

120

125

130REER (1999=100), Price DeflatorExports of Goods and Services

120

125

130

105

110

115

105

110

115

85

90

95

100

NEASEA-4SEA 3

90

95

100

NEASEA-4SEA 3

80

85

1994 1996 1998 2000 2002 2004 2006 2008

SEA-3Italy

Source: European Commission, IMF Staff Calculations

80

85

1994 1996 1998 2000 2002 2004 2006 2008

SEA-3Italy

26

Growth performance after EMU entry is mixedGrowth performance after EMU entry is mixed

Growth per capita declined in Italy, Spain, Portugal and Malta

Italy, Portugal and Malta are diverging from NEA income levels or not convergingconverging

PPP GDP per capita in percent of 90

100Average real GDP growth per capita

5

6

before EMU after EMUNorthern euro-area countries (population-weighted average)

70

80

3

4

50

60Cyprus GreeceItalyMalta Portugal

1

2

401985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

PortugalSloveniaSpain

Source: IFS statistics, World Bank WDI, IMF Staff Calculations

0Cyprus Greece Italy Malta Portugal Slovenia Spain

27


1. Evidence from real effective exchange rates (REER) and growth performance

2. Formal measures of competitiveness gaps

28

The Macro Balance Approach (MB)The Macro Balance Approach (MB)

Drawback of CA and REER measures: change in CA and REER may reflectDrawback of CA and REER measures: change in CA and REER may reflect adjustment to a new equilibrium instead of competitiveness problem

In MB approach, CA norm is the predicted value of CA regression including fundamental determinants of saving and investment (see IMF Consultative Group on Exchange Rate Issues)Group on Exchange Rate Issues)

Use our regression to calculate norms for each country for 2008 and compare these to the actual CA deficit corrected for the cycle

One issue is whether the EMU and euro effects should be part of the normOne issue is whether the EMU and euro effects should be part of the norm – to what extent are they structural, representing a structural shift on the financing side, versus an over‐reaction to the process of economic integration and e cessi e borro ing?

29

integration and excessive borrowing?

The External Sustainability Approach (ES)The External Sustainability Approach (ES)

The ES approach calculates the CA which stabilizes net foreign assets (NFA)The ES approach calculates the CA which stabilizes net foreign assets (NFA) at some reference level, usually the latest observed value

g π+ NFAg

gCAπ

π++

+=

1

where g is assumed medium‐term real GDP growth rate and π the assumed medium‐term inflation.

30

CA of SEA countries are excessiveCA of SEA countries are excessiveThe excessive component of deficits are much larger if EMU/Euro effects are not or only partially considered to be structuralare not or only partially considered to be structural

The ES norms are more in line with the MB norms without EMU/Euro effects

And ES norms are not particularly demanding for many countries which have already very low NFA

Current Account Norms

ES NormCurrent Accounts in 2008

Estimated MB Norm without EMU/Euro

Dummies

Estimated MB Norm with EMU/Euro

Dummies

(Percent of GDP)

Underlying Current

Account 1/

SEA -9.0 -8.4 -5.3 -1.1 -1.5SEA-4 -9.9 -9.8 -8.0 -4.0 -2.8Italy -3.4 -3.7 -4.8 -0.5 -0.2


1/ The current account balance that would emerge at zero output gap both domestically and in partner countries,

i.e., the current account adjusted for the presence of output gaps in 2008.

31

The needed adjustments in CA are sizeableThe needed adjustments in CA are sizeable

1‐1.5 percentage point annual improvement in CA needed to reach norm in 5 years

Larger adjustments in Cyprus, Greece, Malta, Portugal and Spain

Smaller adj stments in Ital and Slo eniaSmaller adjustments in Italy and Slovenia

ES NormEstimated MB Norm without EMU/Euro

Annual Improvement in Current Accounts to Reach Norms in 5 years(Percent of GDP)

Estimated MB Norm with EMU/Euro

Underlying Current

SEA -8.4 0.6 1.5 1.4SEA-4 -9.8 0.4 1.1 1.4Italy -3.7 -0.2 0.6 0.7

DummiesDummiesAccount 1/

y


1/ The current account balance that would emerge at zero output gap both domestically and in partner countries,

i.e., the current account adjusted for the presence of output gaps in 2008.

32

The estimated competitiveness gaps are largeThe estimated competitiveness gaps are large

Competitiveness gap is measured as percent change in REER needed to b l l fbring actual CA to its norm, using elasticities of CA to REER

Competitiveness gap is 40 percent on average for SEA‐4 and somewhat lower for Italy at 20 percenty p

Estimates of Real Exchange Rate Gap 1/(Percent)

SEA 16.1 32.2 33.2SEA-4 17.1 36.9 43.5Italy -7.0 21.0 23.1

Estimated MB Norm without EMU/Euro Dummies 2/

Estimated MB Norm with EMU/Euro Dummies 2/ ES Norm 2/

y


1/ The elasticity of current account to real effective exchange rate assumes changes in the real effective exchange rate affect the current account

mainly through trade balance, i.e., ε∆(CA/GDP)/∆RER can be calculated from (export elasticity)x(export to GDP ratio)-(import elasticity -1)x(import to GDP ratio).

The export and import elasticity are from CGER estimates with the values of -0.71 and 0.92 respectively.

2/ Corresponded to the underlying current account which is the current account balance that would emerge at zero output gap both

domestically and in partner countries, i.e., the current account adjusted for the presence of output gaps in 2008.

33

Are the current account deficits excessive?Are the current account deficits excessive?

1 Evidence from real effective exchange rates (REER)1. Evidence from real effective exchange rates (REER) and growth performance

2 Formal measures of competitiveness gaps2. Formal measures of competitiveness gaps3. Impact of the global financial crisis

34

Despite the current unwinding, CA deficits are expected to remain vulnerable

Expected average improvement of 2.8 percent of GDP

Current Account Balance(Percent of GDP)

0

4

8

0

4

8Current Account Balance

(Percent of GDP)

0

4

8

0

4

8

12

-8

-4

12

-8

-4

12

-8

-4

12

-8

-4

-20

-16

-12

-20

-16

-12

Southern euro areaNorthern euro area

-20

-16

-12

-20

-16

-12GreecePortugalSpainCyprusMaltaSloveniaItaly


-242005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-24 -242005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-24y

35

…putting further pressure on already very negative net international investment positions for Greece Spaininternational investment positions for Greece, Spain,

and Portugal

Net International Investment Position at end-2007(Percent of GDP)

150

200

250

150

200

250

50

100

150

50

100

150

-50

0

Icel

and

Gre

ece

Cro

atia

Por

tuga

lH

unga

ryew

Zea

land

Bul

garia

Spa

inE

ston

iaLa

tvia

Aus

tralia

Lith

uani

aak

Rep

ublic

Rom

ania

ch R

epub

licB

razi

lM

exic

oFi

nlan

dK

orea

Slo

veni

aed

Kin

gdom

Ukr

aine

Irela

ndA

ustri

ani

ted

Sta

tes

Eur

o A

rea

Rus

sia

Can

ada

Den

mar

kS

wed

enIn

dia

Isra

elIta

lyN

ethe

rland

sC

ypru

sFr

ance

Ger

man

yM

alta

Bel

gium

na,P

.R.:M

aiJa

pan

Nor

way

Sin

gapo

reLu

xem

burg

Sw

itzer

land

na,P

.R.:H

on

-50

0

Source: IFS Statistics IMF Staff Calculations

-150

-100

Ne

Slo

va

Cze

c

Uni

te Un N

Chi

n SC

hin

-150

-100

36

Source: IFS Statistics, IMF Staff Calculations

Policy options in a currency union?

37

Why should a country worry about a large CA deficit in a currency union?

They may be suboptimal if they result from distortions (Blanchard 2007)They may be suboptimal if they result from distortions (Blanchard, 2007)Examples: low net savings resulting from transitory booms in asset prices (Spain); excessively rosy expectations about future growth (Portugal)

When CA deficit is associated to a competitiveness problem, it is likely to require a protracted period of low growth to recover afterwards –q p p gespecially in currency union

Potential threat to the stability of the union

Accentuation of political problemsAccentuation of political problems

They imply multiple and mutually‐reinforcing macroeconomic vulnerabilities in case of sudden stop of external financing

Vulnerability to sudden stop of external financing (liquidity issues, deleveraging and sharp contraction of domestic demand)

38

g g p )

Vulnerabilities on the asset side of banks’ balance sheet

What are the policy options?What are the policy options?

Fiscal policyR i li i th t i ht b di t ti d d i i (Removing policies that might be distorting and reducing savings (e.g. mortgage interest relief)

Fiscal consolidation, especially if public saving is too low or monetary policy ltoo lax

“Internal devaluation”: reducing labor costs at home relative to trading partners

Reducing social security contributions financed by increased VAT rates

Reducing indexation of wages to inflation

Reassessing other wage impacting policies: minimum wage growthReassessing other wage impacting policies: minimum wage growth, unemployment benefits

Structural policies to improve productivity growth, including in d blnontradable sector

Capital investment, education, innovation, product market regulation and the business environment

39Regulatory financial policies

The impact of appropriate policy adjustments can be large

The Improvement in Current Accounts from Policy Changes(Percent of GDP)

avg NEA min NEA avg NEA max NEAItaly -1.1 0.0 1.9 2.6Greece 1.0 2.1 -1.1 -0.4Portugal 1.4 2.5 0.8 1.6

labor productivity growth 2/ratio of min to mean wage 1/(Percent of GDP)

gSpain 0.0 1.1 1.7 2.4Source: IMF Staff Calculation1/ Each country lowers its ratio of minimum to mean wage to the lowest/average level in the NEA (Austria, Germany, Finland)2/ Each country brings its labor productivity growth to the highest/average levels observed in NEA (Finland and Netherlands)

40

ConclusionsConclusions

The large CA declines in SEA were associated with large declines in privateThe large CA declines in SEA were associated with large declines in private saving rates, and only moderate increases in investment rates.

Yet, the CA declines would not have occurred, despite the decline in saving rates, if it was not for the creation of EMU and especially the introduction of the Euro. Euro adoption allowed to maintain investment at a higher level than domestic saving by improving access to the international pool of saving.

The CA deficits are larger than what we can explain with equilibrium models using underlying fundamentals and therefore would appearmodels using underlying fundamentals and therefore would appear excessive.

The large CA deficits present risks to the economy and therefore matter, even in a currency union.

If countries don’t take action, they could be faced with a protracted period of low growth, with possible consequences of the stability of the currency

41

o o g o , poss b e co seque ces o e s ab y o e cu e cyunion.

ItalyItalyNot an external sustainability problem: CA deficit is still moderate (despite declining trend), net international investment position is close to balance,declining trend), net international investment position is close to balance, household saving rate is high.

More a dynamism issue: growth is low and has declined; income per capita has been diverging from NEA levels. Chronic weak productivity growth is feeding into weakening competitiveness. Wage growth is not particularly high. Some evidence of moving up the value added ladder but not strong enough.

Italy has lost competitiveness but less than boom countries. CA deficit is relatively large given that growth was slow and domestic demand was not booming. Current estimated competitiveness gap is about 20 percent.

42

The EndThe End

43

xxxxxx

xxx

Current Account Saving Rate Investment Rate

Determinants of the Current Accounts and Saving and Investment Rates 1/(Percent of GDP)

(a) (b) (c )Standard variables:

Initial net foreign assets 0.042 0.037 -0.005[5.88]*** [3.94]*** [0.58]

General government balance (percent of GDP) 0.204 0.377 0.175[4 00]*** [4 41]*** [2 08]**[4.00]*** [4.41]*** [2.08]**

Growth opportunities:Growth of GDP per capita -0.057 0.921 0.979

[0.68] [5.85]*** [6.43]***Relative income per capita 0.031 0.087 0.056

[2.44]** [4.46]*** [3.31]***Demographics:

Population growth -0.716 -1.367 -0.647[2.01]** [2.36]** [1.15]

Current old-age dependency ratio -0.158 -0.591 -0.433[2.67]*** [6.65]*** [4.97]***

Future old-age dependency ratio 0.057 0.205 0.148[1.25] [2.78]*** [2.12]**

Oil balance 0.238 0.259 0.021[6.61]*** [3.85]*** [0.40]

Financial center dummy variable 0.022 0.047 0.025[2.75]*** [4.24]*** [2.05]**

Observations 411 409 409

44

Adjusted R-squared 0.56 0.49 0.24Source: IMF staff calculations.1/ Robust t statistics are in parentheses; *, **, and *** denotes significance at the 10 percent, 5 percent, and 1 percent, respectively.All regressions include a constant and time-fixed effects and are estimated by ordinary least squares.

Documents

CtCurrent AtA IblI mbalances in the SthS outhern Euro Area ...€¦ · 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008-12-10-Northern euro area,