"Using the financial balances accounting identity, we analyze whether there is evidence in recent national accounting data and the projections of the Stability Programmes (SP), that the focus on fiscal deficits to the exlusion of other economic magnitudes risks further deterioration of the euro area economy's growth rate. We find that, in the past and with focus on shrinking public deficits, growth forecasts have almost always been deteriorating from one SP batch to the next, while the macroeconomic situation is not markedly different from the beginning of the euro are crisis, 2010. We conclude that continued fiscal austerity and disregard of current account imbalances is likely to lead to further deteriorating data that fails to live up to current growth forecasts. This will lead in turn to further growth forecast downward revision in the next SP batch. A simple simulation of a deterioration in the external economic environment indicates that a symmetric rebalancing of the current account imbalances might be more feasible than the current, asymmetric rebalancing."

Support: Digital