Chapter 2: Macroeonomic adjustment in the euro area – the cases of Ireland and Italy

Lars Calmfors, Giancarlo Corsetti, Michael Devereux, Seppo Honkapohja, Gilles Saint-Paul, Hans-Werner Sinn, Jan-Egbert Sturm and Xavier Vives

EEAG Report on the European Economy, 2007, 59-72

Abstract: This chapter analyses macroeconomic adjustment within the euro area. The focus is on the adjustment problems in Ireland (which has had a booming economy) and Italy (which has instead been exposed to strong contractionary shocks). The analysis stresses how adjustment processes may be much more complex than was believed earlier. One reason is asset price dynamics. Another is that supply- side adjustment mechanisms, such as labour migration, may also have demand effects. A key conclusion is that deregulations that enhance productivity growth may be a key adjustment mechanism in the medium term for a country – like Italy – that needs to improve its competitiveness.

Date: 2007
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