Sudden stops and current account reversals: the euro area experience

The paper analyzes the impact of massive capital flows and possible sudden stops on current account reversals. The aim of this paper is to consider the relationship between sudden stops and current account reversals in the eurozone and to explain the possibility of a balance-of-payment crisis within a monetary union.

Peripheral eurozone countries experienced significant private-capital inflows from the core countries, followed by unambiguously massive outflows. Due to this, peripheral countries ran sustained current account deficits while core countries ran surpluses.

At the end we analyze the evolution of current-account balances in the non-euro area EU countries and the peripheral euro-area countries, and we find out that current account deficits could be maintained over a longer period of time in the peripheral euro-area countries.