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Current account imbalances in the euro area: Catching up or competitiveness?

Author

Listed:
  • Belke, Ansgar
  • Dreger, Christian
Abstract
In the debate on global imbalances, the euro area countries did not receive much attention so far. While the current account is on balance for the entire area, divergences between individual member states have increased since the introduction of the common currency. In this paper, the imbalances are traced back to catching up and competitiveness factors using paneleconometric techniques. In line with the intertemporal approach to the current account, low income countries tend to run deficits, while rich countries realize surpluses. However, the effect diminishes, if early years are dropped from the sample. The competitiveness channel is more robust and shows the expected sign, i.e. real appreciation leads to external deficits. To restore competitiveness, a reduction of unit labour costs is on the agenda. Since a deterioration of competitiveness is not a feasible strategy for the surplus countries, an asymmetric response across countries is required in order to reduce the imbalances.

Suggested Citation

  • Belke, Ansgar & Dreger, Christian, 2011. "Current account imbalances in the euro area: Catching up or competitiveness?," VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48711, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc11:48711
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    More about this item

    Keywords

    Current account imbalances; catching up and competitiveness; euro area;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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