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Inter-Temporal Savings, Current Account Dynamics and Asymmetric Shocks in a Heterogeneous European Monetary Union

  • Schnabl, Gunther
  • Zemanek, Holger

In the current debate on the reasons and implications of the Greek and Irish euro crisis, the intra-European current account imbalances have gained rising attention. Whereas Greece and Ireland struggle for austerity in private and public spending, Germany is urged to reduce its current account surplus by increasing wages to forestall a new build-up of unsustainable intra-E(M)U indebtedness. We analyse the emergence of intra-European imbalances since the year 1990 based on the theory of optimum currency areas. We show that the asymmetric shock of the German unification can be seen not only as the origin of the 1992/93 crisis of the European Monetary System, but also for the rising intra-European current account imbalances since the euro introduction and thereby the current European debt crisis. Based on this finding we argue that an increase of German spending to reduce its current account surplus is not only in the interest of German taxpayers to contain financial risk, but would also impose austerity on the rest of Europe. The resulting new wave of crisis could trigger a new round of monetary expansion in the EMU.

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis with number 48685.

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Date of creation: 2011
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Handle: RePEc:zbw:vfsc11:48685
Contact details of provider: Web page: http://www.socialpolitik.org/
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  1. Schnabl, Gunther & Freitag, Stephan, 2010. "Reverse causality in global current accounts," Working Paper Series 1208, European Central Bank.
  2. Karl Brenke, 2001. "Löhne in Ostdeutschland: Anpassung an das westdeutsche Niveau erst auf lange Sicht möglich," DIW Wochenbericht, DIW Berlin, German Institute for Economic Research, vol. 68(24), pages 357-364.
  3. Zemanek, Holger & Belke, Ansgar & Schnabl, Gunther, 2010. "Current Account Balances and Structural Adjustment in the Euro Area," Ruhr Economic Papers 176, Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI), Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
  4. Joachim Ragnitz, 2010. "Strukturelle Ursachen des Einkommensrückstands Ostdeutschlands," ifo Dresden berichtet, Ifo Institute for Economic Research at the University of Munich, vol. 17(02), pages 17-23, 04.
  5. Hoffmann, Andreas & Schnabl, Gunther, 2009. "A Vicious Cycle of Manias, Crashes and Asymmetric Policy Responses - An Overinvestment View," MPRA Paper 18532, University Library of Munich, Germany.
  6. Holger Zemanek, 2010. "Competitiveness Within The Euro Area: The Problem That Still Needs To Be Solved," Economic Affairs, Wiley Blackwell, vol. 30(3), pages 42-47, October.
  7. repec:rwi:repape:0176 is not listed on IDEAS
  8. Ronald I. McKinnon, 2004. "Optimum Currency Areas and Key Currencies: Mundell I versus Mundell II," Journal of Common Market Studies, Wiley Blackwell, vol. 42(4), pages 689-715, November.
  9. Corsetti, Giancarlo & Devereux, Michael P. & Hassler, John & Jenkinson, Tim & Saint-Paul, Gilles & Sinn, Hans-Werner & Sturm, Jan-Egbert & Vives, Xavier, 2009. "The financial crisis," Munich Reprints in Economics 20099, University of Munich, Department of Economics.
  10. Koedijk, Kees G & Kool, Clemens J M, 1992. "Tail Estimates of East European Exchange Rates," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(1), pages 83-96, January.
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