The mirage of current account adjustment in the Euro-periphery

Ongoing international financial integration and the introduction of the euro significantly improved borrowing conditions in the Euro-periphery countries and boosted their aggregate demand. Much of the growing private and public indebtedness financed net imports of goods and services.

Although not all peripheral countries are alike, there is evidence that imports were extensively used for consumption rather than profitable investment purposes. As a consequence, current account deficits prior to the financial crisis were unsustainable. All this raises doubts about the ability to service the accumulated external debt in the future.

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