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Intra-euro rebalancing is inevitable but insufficient

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  • Zsolt Darvas

Abstract

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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  • Zsolt Darvas, 2012. "Intra-euro rebalancing is inevitable but insufficient," Policy Contributions 747, Bruegel.
  • Handle: RePEc:bre:polcon:747
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    References listed on IDEAS

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    1. Egert, Balazs & Halpern, Laszlo, 2006. "Equilibrium exchange rates in Central and Eastern Europe: A meta-regression analysis," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1359-1374, May.
    2. Jean Pisani-Ferry & Silvia Merler, 2012. "The simple macroeconomics of North and South in EMU," Working Papers 740, Bruegel.
    3. repec:wsi:jicepx:v:03:y:2012:i:02:n:s1793993312500123 is not listed on IDEAS
    4. Zsolt Darvas, 2012. "Productivity, labour cost and export adjustment: Detailed results for 24 EU countries," Working Papers 737, Bruegel.
    5. Zsolt Darvas & Jean Pisani-Ferry, 2011. "Europe's growth emergency," Policy Contributions 623, Bruegel.
    6. Guntram B. Wolff, 2012. "Arithmetic is absolute: euro area adjustment," Policy Contributions 724, Bruegel.
    7. 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.
    8. Davide Furceri & Stéphanie Guichard & Elena Rusticelli, 2012. "Medium-Term Determinants Of International Investment Positions: The Role Of Structural Policies," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(02), pages 1-32.
    9. Zsolt Darvas, 2012. "Compositional effects on productivity, labour cost and export adjustments," Policy Contributions 730, Bruegel.
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    Cited by:

    1. Georgescu, George, 2016. "Prospects of Romania’s international investment position and financial stability risks," MPRA Paper 69501, University Library of Munich, Germany.
    2. Mariarosaria Comunale & Jeroen Hessel, 2014. "Current account imbalances in the Euro area: Competitiveness or financial cycle?," DNB Working Papers 443, Netherlands Central Bank, Research Department.
    3. Cécile Couharde & Serge Rey & Audrey Sallenave, 2016. "External debt and real exchange rates’ adjustment in the euro area: new evidence from a nonlinear NATREX model," Applied Economics, Taylor & Francis Journals, vol. 48(11), pages 966-986, March.
    4. Zsolt Darvas, 2012. "The euro crisis: ten roots, but fewer solutions," Policy Contributions 755, Bruegel.
    5. Mika Nieminen & Juha Junttila, 2016. "Short-Run Dynamics of the Trade Balance in the Emu-12 Countries," Manchester School, University of Manchester, vol. 84(S1), pages 56-83, September.
    6. Magas, István, 2014. "Válságtanulságok nagy adagban, erősen fűszerezve. Farkas Beáta (szerk.): The Aftermath of the Global Crisis in the European Union. Oxford Scholars Publishing, Newcastle, UK, 2013, viii + 280 oldal
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(1), pages 113-118.
    7. Federico Steinberg & Mattias Vermeiren, 2016. "Germany's Institutional Power and the EMU Regime after the Crisis: Towards a Germanized Euro Area?," Journal of Common Market Studies, Wiley Blackwell, vol. 54(2), pages 388-407, March.
    8. Christoph Zwick, 2016. "Current Account Adjustment in the Eurozone: Lessons From a Flexible Price Model," The World Economy, Wiley Blackwell, vol. 39(7), pages 1025-1045, July.
    9. Servaas Storm & C.W.M. Naastepad, "undated". "Crisis and Recovery in the German Economy: The Real Lessons," Working Papers Series 10, Institute for New Economic Thinking.
    10. Storm, Servaas & Naastepad, C.W.M., 2015. "Crisis and recovery in the German economy: The real lessons," Structural Change and Economic Dynamics, Elsevier, vol. 32(C), pages 11-24.

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