External Imbalances in EMU. Reforms, Austerity and Funding

The paper is about external imbalances in the EMU, from the euro’s inception on. This lapse of time - 2000-14 - has been divided into three periodseach of them defined on the basis of what is deemed to be the-moment-prevailingtheoretical scheme: the competitiveness model, the excess of savings or insufficientdomestic demand, the change of International Investment Position, or BoP funding.The first period (2000-06) highlights the crucial importance of structural reforms toaddress - in normal situations - member states’ competitiveness losses. Consequencesand cures of the 2007-2010 external imbalances have been heavily affected by theausterity policies. Finally the third episode of the BoP imbalances has been discussedon the basis of a very peculiar institutional mechanism designed to fund, when thenational banking system needs it, the intra-eurozone transactions, or TARGET2.Theoretical schemes of the external imbalances episodes are identified on the basis ofundisputable aspects and not according to econometric estimates, as they could bringto the wrong conclusion. (McKinnon [2013]. The external imbalance topic is one ofthe most interesting and complex problems of an incomplete monetary union, suchas the EMU. Indeed, all the papers dealing with “external imbalances in EMU” moreor less implicitly maintain that we have to do with a true monetary union. Still moreimportant is, according the paper, the interaction between external imbalances and theEMU policies and institutional framework, which is usually ignored, as though it wereunimportant. This paper aims at detecting the crucial role that policies and institutionalaspects assume in defining causes, consequences and cure of external imbalances. Ina word: in defining the right model of imbalances. This is particularly important whenwe talk about monetary union. But this aspect has been utterly overlooked. This paperaims at filling this lack. In particular we also try to elucidate links between structuralreforms, austerity and current account imbalances.