BPEA | 2002 No. 2

Current Account Deficits in the Euro Area: The End of the Feldstein-Horioka Puzzle?

Francesco Giavazzi and Olivier Blanchard
Olivier Blanchard C. Fred Bergsten Senior Fellow - Peterson Institute for International Economics

2002, No. 2

In 2000–01 the current account deficit of Portugal reached 10 percent
of its GDP, up from 2–3 percent at the start of the 1990s. These deficits
are forecast to continue in the 8–9 percent range for the indefinite future.
Greece is not far behind. Its current account deficit in 2000–01 was equal
to 6–7 percent of GDP, up from 1–2 percent in the early 1990s, and again,
the forecasts are for deficits to remain high, in the 5–6 percent range.
This is not the first time that some of the small member countries of the
European Union have run large current account deficits. In the early
1980s, for example, Portugal ran deficits in excess of 10 percent of GDP.
But those deficits had a very different flavor from today’s: Portugal then
was still reeling from its 1975 revolution, from the loss of its colonies,
and from the second oil shock; the government was running a large budget
deficit, in excess of 12 percent of GDP. The current account deficits
were widely perceived as unsustainable, and indeed they turned out to be:
between 1980 and 1987, the escudo was devalued by 60 percent, and the
current account deficit was eliminated. In contrast, Portugal today is not
suffering from large adverse shocks; the official budget deficit has been
reduced since the early 1990s (although with some signs of relapse in 2002, as current estimates imply that Portugal may exceed the limits
imposed by the 1997 Stability and Growth Pact among the countries participating
in European monetary union); and financial markets show no
sign of worry.
The fact that