Determinants of Internal and External Imbalances within the Euro Area
AbstractThe 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 InfoPaper provided by University of Verona, Department of Economics in its series Working Papers with number 01/2014.
Date of creation: Jan 2014
Date of revision:
Euro Crisis; Intra-EMU Imbalances; Sovereign Debt Crisis; Current Account Imbalances; Target2; Balance-of-Payment Crisis;
Find related papers by JEL classification:
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F34 - International Economics - - International Finance - - - International Lending and Debt Problems
This paper has been announced in the following NEP Reports:
- NEP-ALL-2014-02-02 (All new papers)
- NEP-EEC-2014-02-02 (European Economics)
- NEP-MAC-2014-02-02 (Macroeconomics)
- NEP-OPM-2014-02-02 (Open Economy Macroeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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