The Sustainability of External Imbalances in the European Periphery

Abstract

The issue of external imbalances has become a key concern in the global economy, gaining particular prominence also inside Europe, following the Eurozone crisis. Comparatively, however, evidence for the European periphery is much less developed. In this study we investigate the sustainability of external imbalances in 15 countries from the EU's so-called eastern and super-periphery across a range of sustainability tests. We find that external imbalances are, on the whole, large and, despite some significant adjustments in the post-crisis period, they continue to follow paths that are possibly unsustainable. Our results show a higher likelihood of confirming sustainability when looking separately at the current account and the net foreign asset position than when looking jointly at the current and capital accounts (and thus at the intertemporal budget constraint - Bohn J Monet Econ 54(7):1837-1847, 2007). This suggests, albeit tentatively, problems and vulnerabilities that go beyond simple concerns about price competitiveness and the trade performance of the countries under study.