What Drives the Current Account (Im)balancesin the EU and Are they Relevant to Economic Policy?

• Thesis title in Czech: Co způsobuje nerovnováhu běžných účtů v EU a jsou relevantní pro hospodářskou politiku?
• Thesis title in English: What Drives the Current Account (Im)balancesin the EU and Are they Relevant to Economic Policy?
• Academic year of topic announcement: 2018/2019
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Jaromír Baxa, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 24.05.2019
• Date of assignment: 24.05.2019
• Date and time of defence: 15.09.2020 00:00
• Date of electronic submission: 29.07.2020
• Date of proceeded defence: 15.09.2020
• Opponents: Mgr. Michal Paulus

Guidelines

Working hypotheses:

1. Current account imbalances within the European Union receive a disproportionate amount of attention for comparatively low significance/meaningfulness.
2. Drivers of CA deficits changed after the crisis.
3. Target balances the are irrelevant and upper limits such as +6% for the current account in the Macroeconomic Imbalance Procedure are unfounded.
4. Current account surpluses are related to power in the European Union.

For the first part about drivers of current account imbalances, in particular for trade surplus countries, I will provide an overview of the existing literature and their outcomes. Subsequently, I will conduct my own panel regression for several crucial EU countries and the EU as a whole for the past 15 years.

References

Aric, Kivanc Halil et al. (2017). Current Account Dynamics of Central European Countries. European Journal of Economic Studies 6 (2), p. 78-84. Available at: http://ejournal2.com/journals_n/1504095820.pdf.
Eichengreen, Barry (2010). Imbalances in the Euro Area. Available at: https://eml.berkeley.edu/~eichengr/Imbalances_Euro_Area_5-23-11.pdf.
Grömling, Michael et al. (2016). Der deutsche Leistungsbilanzüberschuss – Fluch oder Segen. Wirtschaftsdienst 96 (11), p. 787-805. Available at: https://archiv.wirtschaftsdienst.eu/jahr/2016/11/der-deutsche-leistungsbilanzueberschuss-fluch-oder-segen/.
Harkmann, Kersti and Karsten Staehr (2012). Current Account Balances in Central and Eastern Europe: Heterogeneity, Persistence and Driving Factors. Available at: http://ies.fsv.cuni.cz/default/file/get/id/20935.
IMF. External Sector Reports. Available at: https://www.imf.org/en/Publications/SPROLLs/External-Sector-Reports#sort=%40imfdate%20descending.
Pierluigi, Beatrice and David Sondermann (2018). Macroeconomic imbalances in the euro area: where do we stand? ECB Occasional Paper Series 211. Available at: https://www.ecb.europa.eu/pub/pdf/scpops/ecb.op211.en.pdf.
Timmer, Yannick (2014). Current Account Dynamics in the Euro Area. CES Working Papers 2, p. 165-191. Available at: https://www.ceeol.com/search/article-detail?id=201228.

Preliminary scope of work

In my master thesis I will analyze the drivers of the current account imbalance within the European Union. In recent years, Germany has been criticized by many parties – such as the European Central Bank, the International Monetary Fund, the OECD and the White House – for its exceptionally high current account surplus, which amongst other things, allegedly hampers the recovery of the EU periphery. Several factors driving the intra-EU imbalances have been pointed out already – for instance high domestic savings rates (particularly in Germany), domestic wage restraints, interest convergence in the EU leading to misuse of cheap credits in the EU periphery or the global economic cycle. However, by today, there is no consensus about which factors are responsible for the current account imbalances. My research will contribute to the existing literature with a new attempt of identifying the crucial drivers and classify the role of factors such as the austerity regime and financial flows.
Furthermore, are huge surpluses and imbalances as detrimental as abovementioned institutions claim or do they possibly just represent the power distribution in the European Union? The argument against (excessive) trade surpluses is usually based upon the problems of deficits in the respective other countries. However, these are not inherently harmful to the economy, as the example of the USA shows, which is running a massive current account deficit for decades. In case, this identity turns out to be largely irrelevant for economic policy it would be also worth considering whether the current target balances should be abandoned. If not, what would be economically reasonable upper limits to them? The master thesis allows me to go beyond a purely empirical paper by including political and politico-economic thoughts about the emergence of current account imbalances, their impact on the EU and different policy implications.
I will use data from the European Commission, the International Monetary Fund, the World Bank and the OECD for the panel regression. Furthermore, several reports - such as the External Sector Report of the IMF – and papers on this topic will be used as the basis for my master thesis.

Outline:
1. Introduction
2. Theoretical background and review of existing literature on this topic
3. Methodology
a. The model
b. Data description
4. Analysis of drivers of current account imbalances in the EU: Regression Analysis.
a. Global economic cycle
b. Demography
c. Real estate boom
d. Global value chain
e. Austerity regime
f. Financial flows
g. others
5. Findings: Relevance/Importance of different factors determining current trade balances
6. Alternative explanations for discussion of Germany’s (and other country’s) surpluses
a. Neo-mercantilist views
b. Power distribution in the EU
c. Other (political explanations)
7. Policy Implications: Are target balances necessary – and what would be an economically reasonable upper limit?
8. Conclusion