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The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries

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  • Hubert Gabrisch

    (Halle Institute for Economic Research (IWH))

  • Karsten Staehr

    ()

Abstract

The Euro Plus Pact was approved by 23 EU countries in March 2011. The Pact stipulates a range of quantitative targets meant to strengthen competitiveness and convergence with the ultimate aim of preventing unsustainable financial imbalances from accumulating. This paper uses Granger causality tests and VAR models to assess the direction of causality between changes in the relative unit labour cost and the current account balance. The sample consists of the 27 EU countries for the period 1995–2011. The main finding is that changes in the current account balance affects changes in relative unit labour costs, while there is no discernable effect in the opposite direction. This suggests that the divergence in the unit labour cost between the core countries in Northern Europe and the countries in Southern and Central and Eastern Europe prior to the global financial crisis was partly the result of capital flows from the European core to the periphery. The results call into question the ability of the Euro Plus Pact to avert financial imbalances related to increasing current account deficits in future.

Suggested Citation

  • Hubert Gabrisch & Karsten Staehr, 2012. "The Euro Plus Pact: Competitiveness and External Capital Flows in the EU Countries," Working Papers 324, Leibniz Institut für Ost- und Südosteuropaforschung (Institute for East and Southeast European Studies).
  • Handle: RePEc:ost:wpaper:324
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    Cited by:

    1. Claudius Gräbner & Philipp Heimberger & Jakob Kapeller & Bernhard Schütz, 2017. "Is Europe Disintegrating? Macroeconomic Divergence, Structural Polarisation, Trade and Fragility," wiiw Working Papers 136, The Vienna Institute for International Economic Studies, wiiw.
    2. Walter Paternesi Meloni, 2017. "Austerity & Competitiveness in the Eurozone: a misleading linkage," Departmental Working Papers of Economics - University 'Roma Tre' 0223, Department of Economics - University Roma Tre.
    3. Mariarosaria Comunale, 2016. "A Closer Look at EU Current Accounts," CEIS Research Paper 393, Tor Vergata University, CEIS, revised 11 Aug 2016.
    4. Mariarosaria Comunale, 2017. "A panel VAR analysis of macro-financial imbalances in the EU," Bank of Lithuania Working Paper Series 40, Bank of Lithuania.
    5. Hamid Raza & Gylfi Zoega & Stephen Kinsella, 2017. "Capital inflows, crisis and recovery in small open economies," Birkbeck Working Papers in Economics and Finance 1709, Birkbeck, Department of Economics, Mathematics & Statistics.
    6. Ludek Kouba & Michal Madr & Danuse Nerudova & Petr Rozmahel, 2016. "Policy Autonomy, Coordination or Harmonization in the Persistently Heterogeneous European Union?," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 1, pages 53-71, March.
    7. Benedicta Marzinotto, 2016. "Income Inequality and Macroeconomic Imbalances under EMU," LEQS – LSE 'Europe in Question' Discussion Paper Series 110, European Institute, LSE.
    8. Georg Feigl & Josef Zuckerstätter, 2012. "Wettbewerbs(des)orientierung," Working Paper Reihe der AK Wien - Materialien zu Wirtschaft und Gesellschaft 117, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik.
    9. repec:psl:pslqrr:2017:23 is not listed on IDEAS
    10. Benedicta Marzinotto, 2017. "Euro area macroeconomic imbalances and their asymmetric reversal: the link between financial integration and income inequality," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 34(1), pages 83-104, April.
    11. Bertola, Giuseppe, 2016. "Labor policies and capital mobility in theory and in EMU," European Economic Review, Elsevier, vol. 87(C), pages 62-77.
    12. Karsten Staehr & Robert Vermeulen, 2016. "How competitiveness shocks affect macroeconomic performance across euro area countries," DNB Working Papers 515, Netherlands Central Bank, Research Department.
    13. Berthou, A. & Bourgeon, P. & Vicard, V., 2013. "La compétitivité des entreprises : synthèse de la conférence du réseau CompNet - Banque de France – 20 et 21 septembre 2012," Bulletin de la Banque de France, Banque de France, issue 192, pages 45-51.
    14. 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.
    15. Gheorghe HURDUZEU & Maria-Isadora LAZAR, 2015. "An Assessment of Economic Stability under the New European Economic Governance," Management Dynamics in the Knowledge Economy Journal, College of Management, National University of Political Studies and Public Administration, vol. 3(2), pages 301-315, June.
    16. Berthou, A. & Gaulier, G., 2013. "Dynamiques de salaires et rééquilibrage des comptes courants dans la zone euro," Bulletin de la Banque de France, Banque de France, issue 191, pages 43-58.
    17. Gabrisch, Hubert, 2015. "Cross-border finance, trade imbalances and competitiveness in the euro area," MPRA Paper 68518, University Library of Munich, Germany.
    18. Pilar Beneito & Carlos Chafer, 2017. "Current Account Imbalances and Cost Competitiveness: The Role of the Euro," Working Papers 1703, Department of Applied Economics II, Universidad de Valencia.
    19. Pablo Duarte & Gunther Schnabl, 2015. "Macroeconomic Policy Making, Exchange Rate Adjustment and Current Account Imbalances in Emerging Markets," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 531-544, August.
    20. Stockhammer, Engelbert & Constantine, Collin & Reissl, Severin, 2016. "Neoliberalism, trade imbalances and economic policy in the Eurozone crisis," Economics Discussion Papers 2016-3, School of Economics, Kingston University London.

    More about this item

    Keywords

    European integration; policy coordination; unit labour costs; current account imbalances; economic crisis;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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