Discussion Paper

Foreign Borrowing in the Euro Area Periphery: The End Is Near

Abstract: Current account deficits in euro area periphery countries have now largely disappeared. This represents a substantial adjustment. Only two years ago, deficits stood at nearly 10 percent of GDP in Greece and Portugal and 5 percent in Spain and Italy (see chart below). This sharp narrowing means that spending has been brought in line with income, largely righting an imbalance that had left these countries dependent on heavy foreign borrowing. However, adjustment has come at a sizable cost to growth, with lower domestic spending only partly offset by higher export sales. Downward pressure on domestic spending should abate now that the periphery countries have been weaned from foreign borrowing. The risk, though, is that foreign creditors might demand that the countries pay down (rather than merely service) accumulated external debts, forcing them to reduce spending below incomes.

Keywords: adjustment; balance of payments; investments spending; periphery; imbalances; current account; saving; euro area; exports; competitiveness; imports;

JEL Classification: F00;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2013-05-22

Number: 20130522