Greece Macro Monitor (31 March 2014)
Greece’s current account drivers and forecasts
An empirical study*
The present study employs cointegration techniques and a vector correction model (VECM) to identify and analyze the main drivers of Greece’s current account in recent decades and, especially, in the years following the euro adoption.
Summary – Our econometric results provide broad-based support to the key findings of a number of earlier empirical studies on the determinants of the current account. In more detail, the trend deterioration in the country’s external imbalance in 1999-2008 can be traced back to a number of developments related to: a) the EU convergence process and closer integration in world goods and financial markets; b) domestic authorities’ response to policy challenges arising from participation in the single currency area; and c) the structural characteristics and idiosyncrasies of the Greek economy.
At the Eurozone level, the initial years following the adoption of the single currency saw most countries in the so-called euro area periphery running large current account deficits, with core member states in the richer north featuring significant external surpluses. Despite these large divergences across member states, the outbreak of the global financial crisis found the euro area running a broadly-balanced external position vis-à-vis the rest of the world.
The scale and dispersion of current account imbalances across euro area countries in the initial years following the introduction of the single currency raise credible concerns as to whether such unprecedented imbalances were justified on the basis of underlying macro fundamentals. It also supports the notion that these imbalances were, to a certain extent, overlooked by euro area policy makers.