Twin deficits and financial integration in EU member-states

In this paper, we find that changes in general government balances in the EU-15 member-states are matched to a large extent by opposite changes in the private savings–investment gap, implying that changes in public sector deficits have a rather small relationship with current account deficits. Also, using an empirical framework implied by a well-known, intertemporal model of the current account, we find that current account developments in Greece are explained by factors which are related to financial and economic integration, such as interest rate spreads and growth differentials, as well as to the general government balance.