Current Account Deficit in Europe at COVID-19 Time Report (Assessment)

Introduction

The current account deficit is a state of economic imbalance due to the financial crisis arising from the backlog of the trade sector in a given nation. The current account status reads negative when there are deficits, an indication that growth in business sectors is sustained on debts. The economic imbalances of nations reflect on their gross domestic product (GDP) every quarter within a year (Sadiku et al., 2015, p. 91). The current account balance is impacted by the relative income per person in a nation. Moreover, the exchange rates on a real-time basis, the cycles in various business sectors, and trading agreements determine the current account status. The fiscal policy has also been found to impact the current account status (Sadiku et al., 2015, p. 92). This paper answers the question as to why the European governments will experience a current account deficit following the COVID-19 pandemic. Furthermore, it suggests one of the main policies used to reduce the current account deficit in Europe in the time of the Coronavirus crisis.

Deficits from Economic Drop Following Reduced Production

Economic production to sustain the current account positively on the global market requires the active participation of citizens in businesses. However, the Coronavirus pandemic has driven the already impacted nations into lockdown. Europe is one of the most COVID-19 stricken regions, as per the March 2020 statistics which indicated that 50 percent of the infected populations were from Italy, Spain, and Germany (Benassy-Quere et al., 2020, p. 4). The pandemic shock on major European nations resulted in a reduction in labor forces while the consumption rate remained constant, especially in the food industry and agricultural sectors. Furthermore, the containment measure to ensure sanity for securing citizens from Coronavirus infections has lowered down the trade activities and suppressed the domestic demands. The impact of the pandemic on the lives of productive people has resulted in a recession of economic growth. Consequently, it has led to the Eurozone GDP drop by 3.8 percent. It implies that external support has to be put in place to sustain the economy of the European Nation (Boysen-Hogrefe et al., 2020, pp. 5-13). Therefore, an external economic imbalance of the European governments yields automatic debts that create deficits on their current accounts.

Current Account Deficits from Blocked External Trade

The external economic imbalance is indicated by current account deficits when the global trade programs fail to run as usual. The United Nations Conference on Trade and Development predictions show that the highly infectious coronavirus might draw the Foreign Direct Investment (FDI) into stoppage. Thus, it is likely to produce a drop in global investment rating between 30 to 40 percent. Moreover, it is forecasted that unemployment rates may increase thereby dragging people into poverty (Bell and Blanchflower, 2020, p. 59). Owing to the rapid spread and high mortality rates of COVID-19 recorded in the Eurozone by March 2020, their international trade links and proper running of external businesses are partially or completely terminated. On the contrary, a surplus is sustained through the importation of goods and services from other nations. The consequence of obtaining surplus from external trade platforms on European nations is the drainage of currency value when real-time transaction rates shifts against them (Bell and Blanchflower, 2020, p. 63). Eventually, savings in the current account will be consumed rapidly, and debts will have to be sought for leading to deficits.

Current Account Deficits Following Poor Business Cycles

Operations of different businesses encompass the flow of raw materials to produce resources, marketing, and realizations of profits from the transactions undertaken. The Coronavirus pandemic has placed operations of these businesses at stake. The system of production is curtailed in the European nations with the lockdown. Furthermore, the medium of exchange which is money has become an invalidated asset since it acts as a potential vehicle for the virus to the uninfected population. Eventually, low returns are realized in situations where cash-on-hand transactions are the only avenues through which businesses run. Moreover, the consumption of the citizens in the lockdown has escalated as productivity is reduced. As a result, the flow and efficiency of all business plans which were underway are terminated. It indicates that the value of money in executing business plans have diminished when the demand is high (Gossling et al., 2020, pp. 1-5). Therefore, debts must be incurred to run national activities on a normal basis. Thus, European nations are susceptible to the current account deficit in the future.

The Policy to Reduce Current Account Deficit

Different policies exist as ways for reducing the current account deficit, including the monetary which involves increment of interest rates. However, the application of fiscal policy in initiating deflation would be instrumental in the situation of COVID-19 containment. The principle of fiscal policy is the increase of income tax. By increasing the income tax charged when government and private sector works pay during the non-productive coronavirus pandemic season, the government finances increase while consumption and spending are reduced. Consequently, importation costs will reduce, and external trade programs blockage will not impose heavy expenses on the government (Busch, 2020, p. 542). As a result, current account deficits will be reduced to a greater extent even though the economy is draining.

Reference List

1. Bell, D. N. and Blanchflower, D. G., (2020) ‘US and UK labour markets before and during COVID-19 crash’, National Institute Economic Review, 252(2), pp. 52-69.
2. Benassy-Quere, A., et al. (2020 ‘Corporate debt burdens threaten economic recovery after COVID-19: planning for debt restructuring should start now’, VOX CEPR Policy Portal [21/03/2020]. Disponivel em, 2(4), pp. 1-9.
3. Boysen-Hogrefe, J., et al. (2020) ‘German economy spring 2020-German economy: V(irus)-shaped recession ahead’, Kiel Institute of Economic Outlook, 65, pp. 1-24.
4. Busch, A., (2020) ‘The political economy of the German current account surplus’, In European Social Model Under Pressure. Wiesbaden: Springer VS, pp. 537-554.
5. Gossling, S., Scott, D. and Hall, C. M., (2020) ‘Pandemics, tourism and global change: a rapid assessment of COVID-19’, Journal of Sustainable Tourism, 26(4), pp. 1-20.
6. Sadiku, L., et al. (2015) ‘The persistence and determinants of current account deficit of FYROM: an empirical analysis’, Procedia Economics and Finance, 33(1), pp. 90-100.