Persistent macroeconomic imbalances in the Euro area: causes and consequences

Nils Holinski (), Clemens Kool and Joan Muysken ()

Review, 2012, vol. 94, issue Jan, 20 pages

Abstract: In this paper, the authors document a growing divergence between current account imbalances in northern and southern euro area countries from 1992 to 2007. The imbalance occurred without a concomitant rise in productivity and growth in the southern (deficit) countries. The authors argue that systematic monitoring of external imbalances and implementation of better coordinated policies to prevent the emergence of unsustainably large imbalances in the euro area is advisable because (i) country heterogeneity and the absence of optimal currency area characteristics may lead to the emergence of large cur- rent account imbalances without automatic gains in productivity and economic growth to sustain these imbalances, (ii) the absence of sufficient market-based adjustment mechanisms substantially increases the costs of ultimate adjustment toward more sustainable current account positions, and (iii) large external imbalances?particularly through the major role of the banking system?potentially have strong negative consequences for fiscal policy.

Keywords: Macroeconomics; European Union countries; Balance of payments (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (76)

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