Current Account Dynamics in New EU Members: Sustainability and Policy Issues
CEPII Working Paper No. 2004-07
52 Pages Posted: 19 Jun 2006
Date Written: July 1, 2004
The twelve Central and Eastern European Countries, which either joined the European Union in May 2004 or are scheduled to do so as early as 2007 , often show high current accounts deficit, which are sometimes close or even beyond those values common wisdom and past experience associate with a high probability of a Balance of Payment crisis. A natural question therefore arises: are these deficits sustainable or do some countries require policy action? A related question is how the current account is likely to evolve in the medium term. The natural horizon to consider is up to 2007/8 when, according to the maintained intentions, some of the new EU members will join EMU as well. The aim of this paper is to provide a tentative answer, by means of three different methods: an accounting exercise and a normative analysis based on an econometric estimation of the determinants of the current accounts, and a projection of external balances. The role of capital inflows, and in particular of Foreign Direct Investment (FDI) is stressed.
Keywords: Current account; new open macroeconomics; panel methods; transition economies
JEL Classification: F15, F14, F17
Suggested Citation: Suggested Citation