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

PORTUGAL; GREECE

The article focuses on current account deficits in the euro area. In 2000-01 the current account deficit of Portugal reached 10 percent of its gross domestic product (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. The fact that both Portugal and Greece are members of both the European Union and the euro area, and the fact that they are the two poorest members of both groups, suggest a natural explanation for today's current account deficits. They are exactly what theory suggests can and should happen when countries become more closely linked in goods and financial markets. To the extent that they are the countries with higher expected rates of return, poor countries should see an increase in investment. And to the extent that they are the countries with better growth prospects, they should also see a decrease in saving. Thus, on both counts, poorer countries should run larger current account deficits, and. symmetrically richer countries should run current account surpluses.