Cover of EconPol Working Paper 72

Fiscal and Current Account Imbalances: The Cases of Germany and Portugal

António Afonso and José Carlos Coelho (EconPol Europe, ISEG - Lisbon School of Economics & Management, Universidade de Lisboa; REM/UECE)

This study’s aim is a comparative analysis between Portugal and Germany regarding the existence of a bidirectional relationship between the budget balance and the current account balance, starting with the introduction of the Euro (1999 and 2002, respectively) to the end of 2020. While the analysis finds a bilateral relationship, it shows that the budget balance and the current account balance for each country have similar and distinct developments, reflecting the distinct characteristics of each economy. One of the most striking findings is that the response of the budget balance to the current account balance is higher in Germany than in Portugal. In addition, public debt as a percentage of GDP positively affects the current account balance in Portugal, but not in Germany. This can be linked to the fact that the debt-to-GDP ratio is higher in Portugal, according to the authors.

Abstract

We investigate the  bilateral relationship between government budget balances and current account balances for Portugal and Germany. We find that the response of the current account balance to the budget balance is greater in Portugal than in Germany. On the other hand, the response of the budget balance to the current balance is higher in Germany than in Portugal. In Portugal and Germany, a fiscal rules index has a negative impact on the current account balance and the government effectiveness index has a positive impact on the government balance. The public debt as a percentage of GDP positively affects the current account balance in Portugal, and  in  Germany  it  does  not.  During  the  period  of implementation of  the  external  assistance programme in Portugal, the current account balance improved, while the government balance did not.

Citation

António Afonso, José Carlos Coelho: "Fiscal and Current Account Imbalances: The Cases of Germany and Portugal", EconPol Working Paper 72, December 2021