The Fiscal Compact and Current Account Patterns in Europe

This paper shall give an overview of the implications to the sectoral balances stemming from the implementation of the Fiscal Compact in the Euro area in 2013. Since there is now a more or less strict limit to deficit spending-absent from cyclical factors-some other sector has to make up for the reduction of the financial deficit of Euro area gov- ernments. While applying sensible estimates on the trajectories of the sectoral balances in the Euro area, I reach the conclusion that the only logical outlet for these (potentially) reduced deficits would be the for- eign sector, reflecting the inability of the private sector to run a sizeable surplus of investments over savings over the long-run. Under the sce- nario described in the paper, the Euro area would run a considerable current account surplus in the foreseeable future.