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Balance of payments adjustment mechanisms in the Euro area

Martina Jiránková () and Pavel Hnát ()
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Martina Jiránková: Department of World Economy, University of Economics, Prague
Pavel Hnát: Department of World Economy, University of Economics, Prague

Eastern Journal of European Studies, 2012, vol. 3(1), 67-86

Abstract: The article aims at analysing the current situation in the Euro area with respect to the balance of payments adjustment mechanism that should normally be at place. Internally, the Euro area membership represents a combination of the fixed exchange rate, capital mobility and no monetary policy autonomy; externally, the Euro area countries apply floating exchange rates with high capital mobility, and autonomous monetary policy. Member states thus cannot use the monetary instruments to prevent external influences; they can only use fiscal policies, which are limited by the Stability and Growth Pact and debt constraint. When external imbalance occurs (such as today), the economies of member states are exposed to the price and income adjustment processes as well as to their own fiscal and ECB policy impacts. This article shows that all these factors interfere and influence real effects of automatic adjustment mechanisms which in some cases cannot come forth at all. Factors within domestic economic policies that limit the restoration of external balance within the Euro area thus create an important outcome of this paper.

Keywords: Euro area; balance of payments; income and price adjustment mechanisms; external imbalance; global imbalances; Mundell-Flemming model. (search for similar items in EconPapers)
Date: 2012
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Handle: RePEc:jes:journl:y:2012:v:3:p:67-86