The Importance of Trade and Capital Imbalances in the European Debt Crisis
The current debate on the European crisis has highlighted the role of fiscal imbalances in explaining the turmoil that has dominated Europe in the past few years. This paper adopts a different point of view by suggesting that intra-European payments imbalances are crucial for the survival of the Economic and Monetary Union (EMU). Indeed, payment imbalances between the North and South have contributed to the accumulation of large stock of foreign debt, while flows of foreign capital ceased to finance productive investments that might have contributed to debt repayments--being used instead to finance consumption and real estate. The dynamic interplay between current account imbalances and the accumulation of foreign debt reveals that, once the system is driven into disequilibrium by a real exchange rate misalignment, the longer a payments imbalance persists and the harder the eventual adjustment will be. Capital reversals, by shifting portfolio balances, then lead the system toward instability, sovereign default, and the collapse of the exchange rate regime. Replacing private with public creditors can temporarily help us to stay away from the point where the system breaks down. But this is only a temporary expedient because the underlying imbalances will need continuing and increasing financing until equilibrium is restored by other means. One permanent solution is the European Central Bank's (ECB) official monetary transactions program, if the potential expansions to the central bank's balance sheet can be tolerated.
|Date of creation:||Jan 2013|
|Contact details of provider:|| Postal: 1750 Massachusetts Avenue, NW, Washington, DC 20036-1903|
Web page: http://www.piie.com
More information through EDIRC
References listed on IDEAS
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.:
- Wendy Carlin, 2013.
"Real Exchange Rate Adjustment, Wage-Setting Institutions, and Fiscal Stabilization Policy: Lessons of the Eurozone's First Decade,"
CESifo Economic Studies,
CESifo, vol. 59(3), pages 489-519, September.
- Carlin, Wendy, 2012. "Real exchange rate adjustment, wage-setting institutions, and fiscal stabilization policy: Lessons of the Eurozone’s first decade," CEPR Discussion Papers 8918, C.E.P.R. Discussion Papers.
- Jarkko Turunen & Richard T. Harmsen & Tamim Bayoumi, 2011. "Euro Area Export Performance and Competitiveness," IMF Working Papers 11/140, International Monetary Fund.
- Gros, Daniel, 2012. "How to deal with macroeconomic imbalances?," CEPS Papers 7479, Centre for European Policy Studies.
- Greenidge, Kevin & Drakes, Lisa & Craigwell, Roland, 2010. "The external public debt in the Caribbean Community," Journal of Policy Modeling, Elsevier, vol. 32(3), pages 418-431, May.
- Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2013. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," Economic Journal, Royal Economic Society, vol. 0, pages 4-30, 02.
- Atish R. Ghosh & Jun I. Kim & Enrique G. Mendoza & Jonathan D. Ostry & Mahvash S. Qureshi, 2011. "Fiscal Fatigue, Fiscal Space and Debt Sustainability in Advanced Economies," NBER Working Papers 16782, National Bureau of Economic Research, Inc.
- Hughes Hallett, Andrew & Di Bartolomeo, Giovanni & Acocella, Nicola, 2012. "A general theory of controllability and expectations anchoring for small-open economies," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 397-411.
- Theofilakou, Nancy & Stournaras, Yannis, 2012. "Current account adjustments in OECD countries revisited: The role of the fiscal stance," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 719-734.
- Pietro Alessandrini & Michele Fratianni & Andrew Hughes Hallett & Andrea Presbitero, 2014. "External Imbalances and Fiscal Fragility in the Euro Area," Open Economies Review, Springer, vol. 25(1), pages 3-34, February.
- Olivier Blanchard & Francesco Giavazzi & Filipa Sa, 2005. "The U.S. Current Account and the Dollar," NBER Working Papers 11137, National Bureau of Economic Research, Inc.
- Blanchard, Olivier & Giavazzi, Francesco & Sá, Filipa, 2005. "The US Current Account and the Dollar," CEPR Discussion Papers 4888, C.E.P.R. Discussion Papers.
- Annicchiarico, Barbara & Di Dio, Fabio & Felici, Francesco, 2013. "Structural reforms and the potential effects on the Italian economy," Journal of Policy Modeling, Elsevier, vol. 35(1), pages 88-109.
- Barbara Annicchiarico & Fabio Di Dio & Francesco Felici, 2012. "Structural Reforms and the Potential Effects on the Italian Economy," CEIS Research Paper 227, Tor Vergata University, CEIS, revised 29 Mar 2012.
- C. Fred Bergsten & Jacob Funk Kirkegaard, 2012. "The Coming Resolution of the European Crisis," Policy Briefs PB12-1, Peterson Institute for International Economics.
- Olivier Blanchard & Francesco Giavazzi, 2002. "Current Account Deficits in the Euro Area: The End of the Feldstein Horioka Puzzle?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 147-210.
- William R. Cline, 2005. "United States as a Debtor Nation, The," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 3993, November.
- Andrew Hughes Hallett & Juan Martinez Oliva, 2012. "Reducing Global Imbalances: Can Fixed Exchange Rates and Current Account Limits Help?," Open Economies Review, Springer, vol. 23(1), pages 163-192, February.
- C. Fred Bergsten & Jacob Funk Kirkegaard, 2012. "The Coming Resolution of the European Crisis: An Update," Policy Briefs PB12-18, Peterson Institute for International Economics.
- Hans-Werner Sinn, 2010. "Rescuing Europe," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(SPECIALIS), pages 1-22, 08. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:iie:wpaper:wp13-1. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peterson Institute webmaster)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.