Improved Structural Competitiveness or Deep Recession? On the recent macroeconomic rebalances in the EMU

Piero Esposito and Marcello Messori

No 2016/3, LEAP Working Papers from Luiss Institute for European Analysis and Policy

Abstract: One of the main problems facing the European Monetary Union is the macroeconomic imbalances between ‘core’ and ‘peripheral’ member states. Though they predated the union’s creation, these problems were highlighted between 1999 and the advent of the international financial crisis. One significant indicator of these imbalances is the often divergent trade and current account disequilibria of these two groups of countries. With the events of 2007-08 and the subsequent ‘flight to quality’ of financial capital, the current account deficits of ‘peripheral’ member states became unbearable. By the end of 2014, all ‘peripheral’ countries had eliminated or drastically reduced their deficits. We show that this result is more dependent on the contraction of their GDP and relative reduction in their average real wages than on a productivity increase in their economy. To reach this conclusion, the paper empirically describes the determinants of the structural evolution in trade and current account imbalances and then offers econometric evidence of the impact of different components of unit labor cost on net exports. Based on this evidence, the paper points out the fragility of the European adjustments and suggests some policy implications.

Keywords: imbalances; disequilibria; euro area; competitiveness; productivity; labor; economic policy; monetary union (search for similar items in EconPapers)
JEL-codes: F15 F16 F36 F45 O52 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2016-03-15
New Economics Papers: this item is included in nep-eec, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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