If any set of countries stood a chance of benefiting from financial integration, surely the European Union accession countries would qualify because of the financial, product and factor market integration bolstered by the superior institutional pull of the EU. But even here hangs a cautionary tale, compellingly illustrated by the experience of the Euro periphery countries, Greece and Portugal. Blanchard and Giavazzi (2002) argued that the large current account deficits they were running at the turn of the millennium were consistent with neoclassical income convergence. These deficits could be explained by higher returns to capital in these capitalscarce, poor countries relative to the Euro Area average, which would propel investment. In addition, higher expected growth would tend to increase consumption in line with the permanent income hypothesis and lower savings. Both factors would lead to larger current account deficits. Empirically, the authors found a growing positive link over time between income and current account balances in the euro area, with the rise in the current account deficits of the poorer countries driven more by a decline in private savings than an increase in investment—a pattern replicated in Greece and Portugal. They also found a decline in the cross-country correlation between savings and investment in the euro area, concluding that ―At least for this last group, the Feldstein-Horioka phenomenon appears to have largely disappeared.‖ (Blanchard and Giavazzi B-G 2002 p. 149). Since the large current account deficits of Greece and Portugal were driven by convergence and integration, B-G argued that there was no immediate cause for worry.

In contrast to Greece and Portugal (but in keeping with self-financed growth) B-G noted that Ireland grew much faster by raising public and hence national savings dramatically. This enabled current account surpluses as well as higher investment rates. The eventual outcome was that Ireland‘s PPP GDP per capita raced from 70 percent of the EU average in 1987 to 120 percent by 2002. Post Great Recession and as of writing this paper, all three countries are mired in a serious sovereign debt crisis—Ireland‘s driven by the bailout of its private banks and Greece‘s and Portugal‘s by unsustainable public debt dynamics.<sup>11</sup> The idea that financial liberalization could stoke vulnerability and eventually publicly financed bailouts of the private sector was not new: the Irish crisis of 2011 is similar to East Asia‘s over 1997-98, where the public finances were sustainable but contingent liabilities built up on the balance sheets of the private sector. And East Asia‘s crisis in turn was eerily similar to Diaz-Alejandro‘s (1985) classic description of the crises in the Southern Cone and Chile in particular over 1979-82 replete with a fixed exchange rate and costly bailouts of the private

> 11 IMF (2008) chapter 6 discusses the sharp contrast between the persistent current account surpluses in emerging Asia and the current account deficits in emerging Europe, and the sustainability of both.  The experience of Greece and Portugal indicates that even seemingly benign current account deficits pose the risk of a build up of serious vulnerability over time.

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