TWIN DEFICITS THREAT IN THE EUROPEAN UNION


Finance

TWIN DEFICITS THREAT IN THE EUROPEAN UNION

In the 1980´s the US economy was marked by until then rather unusual external and internal deficits. Similar situation gradually appeared in other countries. During last decade it was analysed in the case of so called PIIGS countries (Portugal, Ireland, Italy, Greece, and Spain) in the European Union. This co-movement draws interest of many researchers. Generally it is believed that internal deficit (fiscal budget deficit) causes external one (external balance deficit). External balance deficit is usually measured via trade or current account deficit. This phenomenon is called „twin deficit“. Twin deficit problem can be perceived as a vicious circle. High budget deficit generates important current account deficit and this in turn leads to higher budget deficit. Therefore twin deficit threat should be in the centre of attention of policy makers.
Jméno a příjmení autora:

Marianna Sinicakova, Veronika Sulikova, Beata Gavurova

Rok:
2017
Ročník:
20
Číslo:
1
Klíčová slova:
Imbalances, twin deficits, current account, budget balance, threshold
DOI (& full text):
Anotace:
The aim of the contribution was to identify presence and contagion threat of twin deficits, i.e. simultaneous budget and current account deficit in the EU countries. Using correlations and Granger…více
The aim of the contribution was to identify presence and contagion threat of twin deficits, i.e. simultaneous budget and current account deficit in the EU countries. Using correlations and Granger causality testing we recorded existence of twin deficits in most of EU countries. In several countries we confirmed traditional causality that budget deficit implies current account deficit. In several other countries the opposite, known as current account targeting, was true. In two counties (Spain and Hungary) bi-causality was detected. We consider existence of bi-causality as the most complicated situation in practice. Then it is a real vicious cycle. Policy makers must target both imbalances at the same time, to solve this problem, which can be very difficult. Persistent macroeconomic problems in these two countries confirm our assumption.Our paper extends existing literature by determination of two thresholds for public debt-to-GDP which modify occurrence and risk of twin deficits in the EU countries. These break points were identified via threshold panel data model. Twin deficits problems are not probable for countries with public debt-to-GDP lower than 30.668%. However, risk of this phenomenon is much higher if public debt is from 30.688% to 98.126%. Countries with public debt over 98.126% suffer from high and persistent twin imbalances. Therefore we suggest reconsideration of Maastricht criterion on public debt and its reduction to 30%. Finally we observe contagion effect of twin deficits throughout EU countries regardless their economic performance or the euro area membership which is indirectly triggered also in the case of non-euro area members.
Sekce:
Finance

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