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Current Account Imbalances in Europe

Philip R. Lane, IIIS, Trinity College Dublin and CEPR
Barbara Pels, UBS

IIIS Discussion Paper No. 397


The European crisis is partly attributable to the sharp increase in external imbal- ances across Europe during the pre-crisis period. We examine current account imbal- ances in Europe over 1995-2007, together with the underlying saving and investment rates (and their subcomponents). We find that the discrete expansion in current ac- count imbalances during the 2002-2007 period can be attributed to a strengthening in the link between growth forecasts and current account balances. A striking pattern was that greater optimism about future growth was associated with lower savings and higher construction investment, rather than investment in productive capital.

Last updated 28 August 2014 by IIIS (Email).