The costs of rebalancing the Euro area

Stockhammer, Engelbert and Sotiropoulos, Dimitris P. (2012) The costs of rebalancing the Euro area. (Technical Report) Post Keynesian Economics Study Group. 38 p.

Full text not available from this archive.

Abstract

This paper investigates the economic costs of Euro area rebalancing. Based on an old Keynesian model we estimate a current account equation, a wage-Phillips curve and an Okun’s Law equation. All estimations are carried out for a panel of eleven Euro area members (excluding Luxembourg). From the estimation results we calculate the output costs of reducing current account deficits. Greece, Ireland, Italy, Portugal and Spain (GIIPS) had, on average, current account deficits of 8.4% of GDP in 2007. To eliminate these current account deficits, it would necessitate a reduction of GPD by some 47%. These are staggering amounts and, indeed we think that such a reduction of GDP should not be imposed in the GIIPS group. Moreover, we doubt whether it would be politically feasible. In principle there are two ways that trade imbalances could be resolved: deflationary adjustment in the deficit countries or inflationary adjustment in the surplus countries. Presently, the burden of adjustment is exclusively on the deficit countries. Our results indicate that the economic costs of this adjustment to those countries are equivalent to the output loss of the Great Depression. An adjustment of the surplus countries would increase growth and it would come with higher inflation, but it would allow rebalancing without a Great Depression in parts of Europe.

Item Type: Monograph (Technical Report)
Uncontrolled Keywords: Rebalancing; Euro area; current account; Phillips curve; Okun’s law
Research Area: Economics and econometrics
Faculty, School or Research Centre: Faculty of Arts and Social Sciences > School of Economics, History and Politics (from November 2012)
Depositing User: Engelbert Stockhammer
Date Deposited: 09 Jul 2014 09:12
Last Modified: 09 Jul 2014 09:12
URI: http://eprints.kingston.ac.uk/id/eprint/28544

Actions (Repository Editors)

Item Control Page Item Control Page