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Intra-euro rebalancing is inevitable but insufficient

  • Zsolt Darvas

Greece, Portugal and Spain face a serious risk of external solvency due to their close to minus 100 percent of GDP net negative international investment positions, which are largely composed of debt. The perceived inability of these countries to rebalance their external positions is a major root of the euro crisis. Intra-euro rebalancing through declines in unit labour costs (ULC) in southern Europe, and ULC increases in northern Europe should continue, but has limits because: The share of intra-euro trade has declined. Intra-euro trade balances have already adjusted to a great extent. The intra-euro real exchange rates of Greece, Portugal and Spain have also either already adjusted or do not indicate significant appreciations since 2000. There are only two main current account surplus countries, Germany and the Netherlands. A purely intra-euro adjustment strategy would require too-significant wage increases in northern countries and wage declines in southern countries, which do not seem to be feasible. Before the crisis, the euro was significantly overvalued despite the close-to balanced current account position. The euro has depreciated recently, but more is needed to support the extra-euro trade of southern euro-area members. A weaker euro would also boost exports, growth, inflation and wage increases in Germany, thereby helping further intra-euro adjustment and the survival of the euro.

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Paper provided by Bruegel in its series Policy Contributions with number 747.

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Date of creation: Aug 2012
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Handle: RePEc:bre:polcon:747
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  1. Jean Pisani-Ferry & Silvia Merler, 2012. "The simple macroeconomics of North and South in EMU," Working Papers 740, Bruegel.
  2. Bussière, Matthieu & Ca' Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2010. "Methodological advances in the assessment of equilibrium exchange rates," Working Paper Series 1151, European Central Bank.
  3. Zsolt Darvas & Jean Pisani-Ferry, 2011. "Europe's growth emergency," Policy Contributions 623, Bruegel.
  4. Balázs Égert & László Halpern, 2005. "Equilibrium Exchange Rates in Central and Eastern Europe: A Meta-Regression Analysis," William Davidson Institute Working Papers Series wp769, William Davidson Institute at the University of Michigan.
  5. Zsolt Darvas, 2012. "Productivity, labour cost and export adjustment: Detailed results for 24 EU countries," Working Papers 737, Bruegel.
  6. Davide Furceri & Stéphanie Guichard & Elena Rusticelli, 2011. "Medium-Term Determinants of International Investment Positions: The Role of Structural Policies," OECD Economics Department Working Papers 863, OECD Publishing.
  7. Guntram B. Wolff, 2012. "Arithmetic is absolute: euro area adjustment," Policy Contributions 724, Bruegel.
  8. Zsolt Darvas, 2012. "Compositional effects on productivity, labour cost and export adjustments," Policy Contributions 730, Bruegel.
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