The Eurozone: An Inconvenient Truth

Lucian Croitoru

Journal for Economic Forecasting, 2013, issue 2, 193-210

Abstract: In this study, we show that the main problem facing the Eurozone economy is the relatively low competitiveness of the PIIGS economies compared with other economies in the region. Findings show that the defining trait of PIIGS countries is neither budget deficits, nor public debt, but rather the current account deficits (http://ideas.repec.org/a/oen/econom/y2012i03id332.html). The politicians’ initial assumption that joining the Eurozone would lead to the convergence of productivity trends failed to materialize. We argue that, while tightening fiscal discipline within the Eurozone is a must, it does not solve the problem of lack of competitiveness. Adopting rules on capping structural deficits at around 0.5 percent of GDP might prove premature, given the private sector deleveraging process. We reveal the solutions that help exit the crisis without deepening the recession. Among them, a weaker euro would buy time for countries facing a competitiveness deficit to implement far-reaching structural reforms conducive to higher labor productivity. The European Central Bank’s quantitative easing is compatible with this solution.

Keywords: competitiveness; productivity; current account deficit; crisis; recession; quantitative easing; Eurozone (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:rjr:romjef:v::y:2013:i:2:p:193-210

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