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Determinants of Internal and External Imbalances within the Euro Area

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  • Georg Dettmann

    ()
    (Department of Economics (University of Verona))

Abstract

The widening of global current account balances has been an important subject of academic debate in recent years. Several authors have pointed out that there has been a direct link between the world financial crisis in 2007/ 09 and the so called euro crisis since 2010. Structural imbalances, similar to the ones that caused the global financial crisis, might have also been the underlying cause for the events that finally triggered the euro crisis. The current state of literature focuses on the current account side of the problem rather than onto the financial accounts. The purpose of this paper is to show that the capital flows that were created by the particular structure of the EMU were not sustainable. Therefore we will conduct a simplified three country model that shows the capital flows into the EMU and inside the EMU. We find that the core EMU countries served as intermediaries for external investors. We show how this caused the imbalances in the according financial accounts and that a rebalancing of internal current accounts will not be sufficient to stop the Target2 balances from diverging. The EMU ended in an equilibrium in which a system that seemed to have come to a halt after the beginning of the euro crisis is still going on, and there is no mechanism for the core countries to stop the unbalanced capital flows. We will start by elaborating how the same trade shock that hit the US in a symmetrical way, hit the single EMU member statesí Balance-of-Payments asymmetrically. The current reforms only aim on the current account side of the problem and leave out the distortions in the financial accounts. A rebalancing of current accounts will not be sufficient, as long as the bilateral linkages with external trade partners are not balanced with the according financial accounts.

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Bibliographic Info

Paper provided by University of Verona, Department of Economics in its series Working Papers with number 01/2014.

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Length: 31
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:ver:wpaper:01/2014

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Keywords: Euro Crisis; Intra-EMU Imbalances; Sovereign Debt Crisis; Current Account Imbalances; Target2; Balance-of-Payment Crisis;

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References

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  1. Whittaker, John, 2011. "Eurosystem debts, Greece, and the role of banknotes," MPRA Paper 38406, University Library of Munich, Germany.
  2. Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden stops in the euro area," Policy Contributions 718, Bruegel.
  3. Georg Dettmann & Jochen Möbert & Christian Weistroffer, 2012. "Bilateral current account rebalancing in the EMU," Intereconomics: Review of European Economic Policy, Springer, vol. 47(4), pages 257-264, July.
  4. Gunther Schnabl & Stephan Freitag, 2012. "Determinants of Global and Intra-European Imbalances," Global Financial Markets Working Paper Series 25-2011, Friedrich-Schiller-University Jena.
  5. Rudiger Ahrend & Boris Cournède & Robert W.R. Price, 2008. "Monetary Policy, Market Excesses and Financial Turmoil," OECD Economics Department Working Papers 597, OECD Publishing.
  6. Martin Mandler, 2010. "Explaining ECB and FED interest rate correlation: Economic interdependence and optimal monetary policy," MAGKS Papers on Economics 201025, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  7. Martina Cecioni & Giuseppe Ferrero, 2012. "Determinants of TARGET2 imbalances," Questioni di Economia e Finanza (Occasional Papers) 136, Bank of Italy, Economic Research and International Relations Area.
  8. Nils Holinski & Clemens Kool & Joan Muysken, 2012. "Persistent macroeconomic imbalances in the Euro area: causes and consequences," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 1-20.
  9. Axel Lindner, 2011. "Macroeconomic adjustment: the Baltic states versus euro area crisis countries," Intereconomics: Review of European Economic Policy, Springer, vol. 46(6), pages 340-345, December.
  10. Gunther Schnabl & Stephan Freitag, 2012. "Reverse Causality in Global and Intra-European Imbalances," Review of International Economics, Wiley Blackwell, vol. 20(4), pages 674-690, 09.
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