External Imbalances in the Eurozone

The paper examines the extent to which current account imbalances of euro area countries are related to intra‐euro area factors and to external trade shocks. We argue that the traditional explanations for the rising imbalances are correct, but are incomplete. We uncover a large impact of declines in export competitiveness and asymmetric trade developments vis‐a‐vis the rest of the world \x96 in particular vis‐a‐vis China, Central and Eastern Europe, and oil exporters \x96 on the external balance of euro area debtor countries. While current account imbalances of euro area deficit countries vis‐a‐vis the rest of the world increased, they were financed mostly by intra‐euro area capital inflows (in particular by the purchase of government and financial institutions' securities, and cross‐border interbank lending) which permitted external imbalances to grow over time.