European imbalances and shifts of global value chains to the Central European periphery: role of institutions

Abstract

This article deals with the topic of European imbalances. They are defined as large and persistent differences in the current account position of European countries, which are closely connected to the emergence of the financial crisis and the subsequent sovereign debt crisis in 2008. A build-up in current account deficits had been observed from the mid-1990s, namely in two peripheral regions of the EU. However, little attention was paid to the potential differences between the Southern and Central European peripheries of the EU. The emergence of large and persistent current account deficits in Southern Europe was accompanied by a significant shift in gains from global value chains. The aim of this paper is to evaluate the factors that co-determined the changes in the geographic structure of GVCs in Europe. These changes decreased GVC income in Southern Europe, increased it in Central Europe and contributed to the build-up of account imbalances in Southern Europe. Despite the fact that Central Europe was among the deficit regions in European imbalances, the four Central European countries substantially increased their gains from global value chains as well as GVC participation. The shift in GVC activity towards Central Europe between 1995 and 2011 was driven not only by total labour costs but also by better regulatory quality. At the same time, TNCs switching from Southern to Central Europe had to accept worse quality contract enforcement.