Current account and fiscal imbalances in the Euro-area: Siamese twins in an asymmetrical currency union

Rosaria Rita Canale and Ugo Marani

Department of Economics University of Siena from Department of Economics, University of Siena

Abstract: In this paper a model connecting fiscal and external imbalances in Euro peripheral countries is presented. The underlying idea is that, after the negative shock of the 2007 financial crisis, the current account position constitutes the main element in originating different behavior of foreign lenders toward single countries. Once the interaction between the two has started, it turns into a never ending self-fulfilling process. For peripheral countries, positive results of fiscal retrenchments and real devaluation to restore stability and stop capital outflows are subject to unlikely conditions that undermine the improvements of public accounts. The choice governments face is therefore, at least in the short run and in recessive conditions, either to restore the equilibrium of public finance, or to counteract the real shocks coming from the crisis. This conclusion suggests to adopt shared policy instruments to contrast centrifugal forces in EMU.

Keywords: EMU; sovereign debt crisis; current account imbalances; national policies (search for similar items in EconPapers)
JEL-codes: E61 E65 F33 (search for similar items in EconPapers)
Date: 2012-10
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:usi:wpaper:659

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