On the welfare of nations in Europe – Twin deficit hypothesis

1. On the welfare of nations in Europe – Twin deficit hypothesis Mateusz Bogdański Uniwersytet Gdański

2. Agenda • Brief history of European Union • Welfare • Current account • Budget deficit • Twin deficit hypothesis

3. Brief history of European Union 1993 Namechanged to European Union EuropeanEconomicCommunity 1999 Euro in 11 countries 2008 Crisis 1952 Belgium France Germany Italy Luxembourg Netherlands 1986 Portugal Spain 2004 Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia 2007 Romania Bulgaria 1973 Denmark Ireland United Kingdom 1981 Greece 2013 Croatia 1995 Austria Finland EU-13 – New Members EU-14 – Old Members

4. Welfare

5. Current account Current account as % of GDP EU-13 – New Members EU-14 – Old Members

6. Budget Deficits Budget deficit as % of GDP EU-13 – New Members EU-14 – Old Members

7. Current Account vs Budget Deficit

8. Twin deficit hypothesis • In the 1980’s the US current account and budget deficit increased significantly. • As a result of this co-movement, several economists blamed the budget deficit as a result of the deterioration in external balance. • This causal relationship is known as the twin deficit hypothesis.

9. Twin deficit hypothesis • Why this is important? • If the hypothesis is correct • Reduce the budget deficit via tax increase • This would directly decrease the budget deficit • And indirectly reduce the current account deficit by decline of after-tax incomes what would reduce the consumption of imported goods.

10. Thank you