How relevant are balance-of-payments disequilibria in the industrialised countries? The case of the euro area and the United States

The balance of payments, insofar as it is a record of a country’s trade and financial transactions with other countries, is an important source of information for evaluating the economic situation. However, analysing these data is by no means simple, since they can be interpreted in different ways. In a world in which most trade and financial flows are channelled through private agents, a current-account deficit is only a cause for concern insofar as it casts doubt on the sustainability of the exchange-rate regime (or presages large movements in the exchange rate), or is indicative of serious competitiveness problems. Either way, it is difficult to make a diagnosis solely on the basis of the information provided by the balance of payments and other variables need to be taken into account for a better grounded assessment. It is therefore complicated to specify under what conditions the financial markets perceive that the situation of the external sector is not sustainable and a sudden exchange rate correction may take place. A large and persistent current-account deficit may be symptomatic of the fact that national output lacks competitiveness, but it may also arise from strong growth in national investment, financed partly by external savings, that will in the medium term improve competitiveness and restore equilibrium to the external accounts. Moreover, it is difficult to assess to what extent it is currentaccount transactions that give rise to a financial position that has to be covered with net inflows of capital or, by contrast, it is crossborder financial flows that drive current-account developments. Section 2 of this article analyses which variables help to characterise the treatment merited by the analysis of the balance of payments. The case of a developed economy with a flexible exchange-rate regime, such as the United States and the euro area, is examined in Section 3, while Section 4 considers the case of countries linked by a common currency, such as those that have joined the euro area. In the euro-area countries, while the single currency eliminates the risk of the external deficit giving rise to a sharp correction in the exchange rate, the competitiveness problems that may build up are, potentially, more serious, since there is no possibility of correcting them through a currency devaluation. The conclusions are set out in Section 5.