The experience showed that CAD can increase substantially even in a low growth environment if supply constraints impact both growth and external trade as has been the case with us. The higher CAD was accompanied by an increase in the proportion of nonstable flows.
In this regard the midsummer European Council was a disappointment. Recent diplomatic actions however give a reason to expect that leaders of the European Union can agree on a European recovery fund soon. Combined with the individual member states’ fiscal stimulus, this would reinforce the recovery and better share the burden with monetary policy.