Growth and Competitiveness as Factors of Eurozone External Imbalances : Evidence and Policy Implications

The paper assesses the contribution of key factors associated with external imbalances in the Eurozone through the estimation of a panel-data vector autoregressive model over 1975-2011. Growth fluctuations, initially associated with demand booms triggered by unusually low interest rates and later with demand contractions resulting from the crisis and policy adjustments, have been key drivers of current account fluctuations. Changes in competitiveness, measured by real exchange rates or unit labor costs, have played a less important role. Demand shocks have contributed more to current account balance dynamics in the Eurozone periphery than in the core, whereas competitiveness has been a less prominent factor in the periphery but relatively more important in the core. Changes in competitiveness are positively associated with changes in growth. Preventing imbalances from building up in a context of growing financial integration and easy finance warrants enhanced mutual surveillance of fiscal imbalances, but also better regulation of credit markets to prevent excess leverage and concentration of lending in investments prone to speculative bubbles. Coordination of fiscal policy across the Eurozone would facilitate the management of external imbalances without placing an often unwarranted burden on fiscal tightening in countries with sound fiscal positions affected by credit booms. The policies of internal devaluation implemented in the periphery, aimed at promoting external competitiveness, may have had only limited effectiveness in restoring the external balance to equilibrium.

Bibliographic Details

Main Authors:	Diaz Sanchez, Jose Luis, Varoudakis, Aristomene
Language:	English en_US
Published:	World Bank, Washington, DC 2013-12
Subjects:	ACCOUNTING, ASSETS, AVAILABILITY OF CREDIT, BANKING SECTOR, BANKING SYSTEM, BILATERAL TRADE, BOND, BORROWING COSTS, BUDGET CONSTRAINT, BUDGET DEFICITS, CAPITAL ACCUMULATION, CAPITAL FLIGHT, CAPITAL FLOWS, CAPITAL INFLOWS, CENTRAL BANK, COMMERCIAL BANKS, COMMON CURRENCY, COMPETITIVENESS, CONSUMER PRICE INDEX, CONSUMER PRICE INFLATION, CONSUMERS, CONSUMPTION SMOOTHING, CREDIT BOOM, CREDIT BOOMS, CREDIT GROWTH, CREDIT MARKET, CREDIT MARKETS, CURRENT ACCOUNT, CURRENT ACCOUNT BALANCE, CURRENT ACCOUNT BALANCES, CURRENT ACCOUNT DEFICIT, CURRENT ACCOUNT DEFICITS, CURRENT ACCOUNT IMBALANCES, CURRENT ACCOUNT SURPLUS, CURRENT ACCOUNT SURPLUSES, CURRENT ACCOUNTS, DEBT CRISIS, DEBT REPAYMENT, DEBTOR, DEBTOR COUNTRIES, DEPENDENCY RATIO, DEPENDENCY RATIOS, DEPRECIATION, DEREGULATION, DEVALUATION, DEVELOPMENT ECONOMICS, DEVELOPMENT POLICY, DIMINISHING RETURNS, DISCOUNT RATE, DISTORTIONS, DOMESTIC DEMAND, DOMESTIC DEMAND GROWTH, DOMESTIC SAVINGS, ECONOMETRICS, ECONOMIC CONTRACTION, ECONOMIC CRISIS, ECONOMIC GROWTH, ECONOMIC INTEGRATION, ECONOMIC MODEL, ECONOMIC OUTLOOK, ECONOMIC PERFORMANCE, ECONOMIC RELATIONS, ECONOMIC SIZE, ELASTICITY, EMERGING MARKET, EMERGING MARKET ECONOMIES, ENDOGENOUS VARIABLE, ENDOGENOUS VARIABLES, ENFORCEMENT MECHANISM, EQUILIBRIUM, ERROR CORRECTION MODEL, EXCESS DEMAND, EXCHANGE RATE, EXCHANGE RATE DETERMINATION, EXCHANGE RATE RISK, EXOGENOUS VARIABLE, EXPORTS, EXTERNAL BALANCE, EXTERNAL BALANCES, EXTERNAL BORROWING, EXTERNAL COMPETITIVENESS, EXTERNAL DEBT, EXTERNAL DEBTS, EXTERNAL DEFICIT, EXTERNAL DEFICITS, EXTERNAL DEMAND, FEDERAL RESERVE, FEDERAL RESERVE BANK, FINANCIAL CRISIS, FINANCIAL INTEGRATION, FINANCIAL SECTOR, FISCAL BALANCE, FISCAL BALANCES, FISCAL DEFICIT, FISCAL DEFICITS, FISCAL DISCIPLINE, FISCAL IMBALANCES, FISCAL POLICIES, FISCAL POLICY, FISCAL POSITIONS, FIXED EFFECTS, FIXED INCOME, FOREIGN DEBT, FUNDAMENTAL DETERMINANTS, GDP, GDP PER CAPITA, GOVERNMENT BONDS, GOVERNMENT SPENDING, HUMAN CAPITAL, IMBALANCE, IMBALANCES, IMPORTS, INCOME GROWTH, INDEPENDENT MONETARY POLICY, INFLATION, INFLATION RATE, INSTRUMENTAL VARIABLE, INTEREST PAYMENTS, INTEREST RATE DIFFERENTIALS, INTEREST RATES, INTEREST-RATE, INTERNATIONAL BANK, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCIAL INTEGRATION, INTERNATIONAL MONEY, INVESTMENT BOOM, INVESTMENT RATE, INVESTMENT RATES, INVESTMENT RATIO, LABOR FORCE, LABOR MARKET, LABOR MARKETS, LACK OF COMPETITION, LESS DEVELOPED COUNTRIES, LEVERAGE, LOAN, LONG-TERM INTEREST, LOSS OF COMPETITIVENESS, LOSS OF REVENUE, LOW INTEREST RATES, MACROECONOMICS, MARKET DEVELOPMENTS, MARKET EQUILIBRIUM, MARKET REFORMS, MISALIGNMENT, MONETARY POLICY, MONETARY UNION, MORTGAGE, NOMINAL INTEREST RATE, NOMINAL WAGE, OIL PRODUCING COUNTRIES, OPEN ECONOMY, PER CAPITA INCOME, PER CAPITA INCOMES, POLICY ON EXCHANGE RATES, POLITICAL STRIFE, PRICE COMPETITIVENESS, PRICE INDEX, PRICE STABILITY, PRODUCTIVITY, PRODUCTIVITY GROWTH, PUBLIC DEBT, PUBLIC EXPENDITURE, PUBLIC INVESTMENTS, PUBLIC SPENDING, REAL EFFECTIVE EXCHANGE RATE, REAL EFFECTIVE EXCHANGE RATES, REAL EXCHANGE RATE, REAL EXCHANGE RATE APPRECIATION, REAL EXCHANGE RATE MOVEMENTS, REAL EXCHANGE RATES, REAL GDP, REAL INCOME, REAL INTEREST, REAL INTEREST RATE, REAL INTEREST RATES, REAL LONG-TERM INTEREST RATE, REAL LONG-TERM INTEREST RATES, REAL WAGE GROWTH, RECESSION, RELATIVE PRICE, REPAYMENT, SAVINGS RATE, SAVINGS RATES, SLOWDOWNS, SMOOTHING CONSUMPTION, SOVEREIGN DEBT, SOVEREIGN RISK, STANDARD DEVIATION, STRONG DEMAND, STRUCTURAL REFORM, STRUCTURAL REFORMS, STRUCTURAL SHOCKS, SUPPLY-SIDE, SURPLUS COUNTRIES, SURPLUSES, TAX, TAX REVENUES, TIME HORIZON, TRADABLE GOODS, TRADE BALANCE, TRADE BALANCES, TRADE SHOCKS, TRADING, TRADING PARTNERS, UNCOVERED INTEREST RATE PARITY, UTILITY FUNCTION, VARIANCE-COVARIANCE MATRIX, WAGES, WARRANTS, WORLD MARKETS,
Online Access:	http://documents.worldbank.org/curated/en/2013/12/18717042/growth-competitiveness-factors-eurozone-external-imbalances-evidence-policy-implications https://hdl.handle.net/10986/16900
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