europe out of balance: an analysis of current accounts in europe (slides)
DESCRIPTION
Barcelona GSE Master Project by Michel Carlo Nies Master Program: Economics About Barcelona GSE master programs: http://j.mp/MastersBarcelonaGSETRANSCRIPT
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Michel Carlo Nies
Master in Economics 2013/2014
Barcelona Graduate School of Economics
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1. INTRODUCTION
2. THE CURRENT ACCOUNT
3. EMPIRICAL ANALYSIS
4. POLICY RECOMMENDATIONS
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Background: The European sovereign debt crisis
Apart from Greece, most crisis countries displayed moderate levels of sovereign debt
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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
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-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
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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
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Research question: what determines current account positions in Europe?
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Two different, but equivalent ways to define the current account
CA = Trade Balance + Net foreign income + Net current transfers
CA = Savings – Investment
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Differences in competitiveness:
- unit labour costs
- administration
- infrastructure
- corruption, etc.
Failure of financial markets: - allowing over borrowing
- consistently funding bad investments
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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
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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***
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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)
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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
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QUESTIONS
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HAVE A NICE HOLIDAY AND GOOD LUCK FOR THE FUTURE!