A macro-development perspective on euro area imbalances

Policy Study

This policy study by Juan Montecino provides a macro-development perspective on the euro area imbalances. Drawing on insights from development economics, the author provides an overview of the link between external competitiveness, current account imbalances and an economy’s long-term productivity growth.

The study argues that recent macroeconomic trends in the Euro Area suggest that Germany’s current account surpluses are responsible for a ‘Dutch disease’-style de-industrialisation in periphery economies. There are also tentative signs that the loss of competitiveness may leave lasting scars on these economies’ levels of productivity.

The study concludes with some tentative policy recommendations to help address these structural imbalances. On the core country level, these include adopting an expansionary fiscal stance and pursuing wage growth. On the European level, re-engineering industrial policy and the use of targeted subsidies could re-align the real effective exchange rates of core and periphery countries and contribute to solving the problem.

This research is part of a cooperation between FEPS and the Initiative for Policy Dialogue (IPD), based at Columbia University, founded by Nobel Laureate Joseph E. Stiglitz.