In Search of a New Equilibrium. Economic Imbalances in the Eurozone

The book shows that the recent correction of negative imbalances in the current accounts of the large majority of peripheral Member States in the euro area is mainly due to a recession-driven decrease in imports, monetary wage compression, and below-average rates of inflation. This re-equilibrating process led to short-term adjustments, but it has not corrected the structural competitiveness gaps that built up inside the euro area during the first decade of its life (1999-2007) due to the inefficient allocation of financial flows from the European central economies to the peripheral ones. Contrary to the predictions of the standard macroeconomic models based on the "catching-up" mechanism, these financial flows did not adequately foster the productivity of lagged Member States in the euro area. Our proposal is to replace the "invisible hand" of the market with the "visible hand" of a European policy project. We argue that an effective policy initiative would have to combine a programme of European public and private investments with "contractual arrangements" for implementing crucial national reforms. This strategy might provide a short-term positive demand shock as well as strengthen the long-term structural competitiveness of the peripheral Member States without involving direct financial transfers, but allowing an intergovernmental cooperation and a trust-building process under the control of European institutions.

Study conducted by LUISS School of European Political Economy (SEP) on behalf of the Istituto Affari Internazionali (IAI). Presented at the meeting "L'eurozona alla ricerca di un nuovo equilibrio", Rome, 12 November 2014.

Roma, Nuova Cultura, January 2015, 211 p.
Publication date: 

List of Contributors
List of Abbreviations

1. The Current Account Imbalances
1.1. Introduction
1.2. Balance of Goods' Trade
1.3. Services, Total Trade Balance and Export Market Shares
1.4. Current Account Balance
1.5. Current Account Decomposition and Growth Accounting
1.6. Conclusions

2. The Capital and Financial Account Imbalances
2.1. Introduction
2.2. Capital and Financial Accounts
2.3. The Components of the Financial Account
2.4. Net International Investment Position
2.5. Conclusions

3. European Macroeconomic Imbalances: The Models
3.1. Introduction
3.2. The Blanchard-Giavazzi Model and its Criticisms
3.3. The Role of Financial Flows
3.4. Divergence in Unit Labor Costs and Competitiveness
3.5. External Trade and Competitive Pressures
3.6. Current Account Adjustment After the Euro Crises
3.7. Conclusions

4. In Search of the Determinants
4. In Search of the Determinants
4.1. Introduction
4.2. The Institutional Explanation
4.3. Productivity, Cost Competitiveness and Imbalances
4.3.1 Imbalances and the competitive performance of the euro area with respect to US
4.3.2 Is the rebalancing of peripheral Europe a structural phenomenon? Evidence from the deconstruction of ULC growth
   Box 4.1. Unit Labour Cost Decomposition
4.4. The Geography of Trade Imbalances
4.4.1 Trade balances within European countries
   Box 4.2. Price Effects, Volumes Effects and Oil Price Dynamics: Do They Foster Imbalances?
4.4.2 Import and export intensities
4.4.3 Polarization of intra-EMU trade
4.4.4 A summary view on intra-EMU trade imbalances
4.5. Trade and Financial Interlinkages: A Strict Relation
4.6. Some Empirical Evidence from a Gravity Model of Bilateral Trade
4.6.1 The econometric strategy
4.6.2 Results
4.7. Conclusion

5. European Policies and Possible Improvements
5.1. Introduction
5.2. Macroeconomic Surveillance
5.2.1 The early warning system: the MIP scoreboard
5.2.2 The Excessive Imbalance Procedure (EIP)
5.2.3 The new procedures for the prevention of imbalances
5.3. The Effectiveness of the New Procedures
5.3.1 Relative or absolute measures?
5.3.2 Trade and global value chains
5.3.3 The drawbacks of an asymmetric approach
5.4. The Current Policies for Growth
5.5. Growth-enhancing Policies: Some Proposals
5.6. Conclusions


Research area