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Improved Structural Competitiveness or Deep Recession? On the recent macroeconomic rebalances in the EMU

Author

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  • Esposito, Piero

    (LUISS School of European Political Economy)

  • Messori, Marcello

    (LUISS School of European Political Economy)

Abstract

One of the main problems facing the European Monetary Union is the macroeconomic imbalances between ‘core’ and ‘peripheral’ member states. Though they predated the union’s creation, these problems were highlighted between 1999 and the advent of the international financial crisis. One significant indicator of these imbalances is the often divergent trade and current account disequilibria of these two groups of countries. With the events of 2007-08 and the subsequent ‘flight to quality’ of financial capital, the current account deficits of ‘peripheral’ member states became unbearable. By the end of 2014, all ‘peripheral’ countries had eliminated or drastically reduced their deficits. We show that this result is more dependent on the contraction of their GDP and relative reduction in their average real wages than on a productivity increase in their economy. To reach this conclusion, the paper empirically describes the determinants of the structural evolution in trade and current account imbalances and then offers econometric evidence of the impact of different components of unit labor cost on net exports. Based on this evidence, the paper points out the fragility of the European adjustments and suggests some policy implications.

Suggested Citation

  • Esposito, Piero & Messori, Marcello, 2016. "Improved Structural Competitiveness or Deep Recession? On the recent macroeconomic rebalances in the EMU," SEP Working Papers 2016/3, LUISS School of European Political Economy.
  • Handle: RePEc:ris:sepewp:2016_003
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    Cited by:

    1. Ronny Mazzocchi & Roberto Tamborini, 2019. "Current Account Imbalances and the Euro Area: Alternative Views," EconPol Working Paper 27, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    2. Esposito, Piero, 2017. "Trade creation, trade diversion and imbalances in the EMU," Economic Modelling, Elsevier, vol. 60(C), pages 462-472.
    3. Ronny Mazzocchi & Roberto Tamborini, 2021. "Current account imbalances and the Euro Area. Controversies and policy lessons," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 38(1), pages 203-234, April.

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    More about this item

    Keywords

    imbalances; disequilibria; euro area; competitiveness; productivity; labor; economic policy; monetary union;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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