Quarterly Bulletin Q3 2013

60
Developments in the International
Quarterly Bulletin 03 / July 13
and Euro Area Economy
Box A: Correction of current account imbalances: how are the periphery economies progressing?
By Bernard Kennedy and Mary Ryan
15
%
Box A Chart 1: Current Account as
a Percentage of GDP
%
Box A Chart 2: Change in Current
Account Components as a percentage of
GDP, 2007-2012
30
10
25
5
20
0
15
10
-5
5
-10
0
IE GR ES PT IT
-5
-15
-10
-20
-15
Estonia
Greece
Cyprus
Portugal
Spain
Malta
Ireland
Slovakia
Slovenia
Italy
France
Belgium
2007 2012
Austria
Finland
Netherlands
Germany
Luxembourg
-20
Net Exports of current transfers
Net Exports of Income
Imports
Exports
Source: Eurostat.
Source: Eurostat, authors’ calculations.
Note: Above the line indicates a positive contribution to
current account balance, while the below the line denotes
a negative impact on the current account balance.
The improvement in export performance reflects a combination of competitiveness gains and
partner country demand. As noted by Chen, Milesi-Ferratti and Tressel (2012) 5 , the periphery
countries experienced real exchange rate appreciations in the years prior to the crisis. This
loss of competitiveness originated to some extent in cost increases in the non-traded sectors,
following a reallocation of resources in response to positive demand shocks (e.g. residential
investment boom) with spill-over effects into the traded sector (see ESCB Working Group
on Econometric Modelling, 2012 6 ). The years since the crisis have seen some reversal of the
loss of competitiveness, although it should be noted that real exchange rates deflated by unit
labour costs can exaggerate the improvement in competitiveness due to compositional effects.
In particular, a shift in economic activity towards higher value added sectors can generate an
improvement in competitiveness without any underlying sectoral improvements (see O’ Brien
2011 7 ). Nonetheless, corrections have been consistent across the peripheral economies and
pronounced in some cases 8 (see Chart 3). Ireland, in particular, witnessed a significant real
exchange rate appreciation largely unwind, with a fall relative to peak of 26 per cent, with early
and sustained adjustment evident. Adjustment in the southern periphery countries was more
gradual at first and has been concentrated from mid-2011 onwards; Greece in particular has
seen a 16 per cent fall in the real exchange rate since then.
5 Chen, Milesi-Ferratti and Tressel. “External Imbalances in the Euro Area”, IMF Working Paper WP/12/236.
6 A team of the Working Group on Econometric Modelling of the ESCB, 2012. “Competitive and external imbalances within
the euro area”, ECB Occasional Paper No. 139, December 2012.
7 O’Brien, Derry (2011) “The compositional Effects in Recent Trends in Irish Unit Labour Costs”, Box A, Domestic Economy
Chapter, Central Bank Quarterly Bulletin, Q1 2011.
8 It is also the case that there is adjustment in the real exchange rate relative to the HICP.