Trade imbalances, domestic demand and export composition in peripheral and core Eurozone countries, before and after the sovereign debt crisis: An input-output approach

The great recession of 2008/2009 and the subsequent sovereign debt crisis highlighted the existence of deep structural imbalances in the Eurozone: large differences of competitiveness and growth potential between its northern (core) and southern (peripheral) countries. In this paper, an input-output approach is used to study two important facets of this phenomenon, namely the nexus between current account (trade) imbalances and domestic (final) demand levels, as well as the sectoral specialization of tradable goods and services production. In the uncompetitive (current account deficit) economies of southern euro area, domestic final demand levels before the crisis were excessive and the opposite occurred in the strong, competitive economies of the north. These external imbalances were closely associated with a pattern of specialization favourable to the northern euro area countries (sectors with higher value added and more intensive technological activities). The empirical results of the paper for the period before the crisis, are based on input-output tables for several years: 1995, 2000, 2005 and 2011, available in the World Input Output Database. The northern euro area group is formed by Germany, Netherlands Finland and Ireland. The southern one is the so-called GIPS group (Greece, Italy, Portugal and Spain). After the (Troika) adjustment programs of 2011/2014, the external imbalances were overcome, by a strong demand compression initially and an export led orientation thereafter. This correction is shown for the Portuguese case, using 2013 and 2017 inputoutput tables for this country and a comparison is made with Germany, the reference country of the core Eurozone group.