The current account adjustment in Greece during the crisis: cyclical or structural?

The substantial narrowing of the Greek current account deficit ¯by more than 13 percentage points of GDP¯ constitutes a significant part of the overall adjustment of the economy in the 2008-2019 period. A major issue, however, is related to whether the factors driving this exter-nal correction are temporary, due mostly to the economic cycle, or structural, in which case they are expected to be sustained over the medium term. In this paper we evaluate the degree to which cyclical versus structural developments have driven the pattern of correction of the country’s exter-nal imbalance, as this is essential in assessing its evolution going forward. Our analysis shows that the current account adjustment has in a considerable part been driven by structural factors, which according to our baseline scenario account for 60% of the overall adjustment. Therefore, most of the correction is of a permanent nature, which means that the relatively high deficits of the pre-crisis period are not expected to re-emerge any time soon. Our results are robust to various income elasticities of trade; the non-cyclical component ranges from 47% to 74% of the current account deficit correction.