Belke, Ansgar; Dreger, Christian:

Current Account Imbalances in the Euro Area-Catching up or Competitivness?

In: DIW Diskussionspapiere = Discussion Papers / Deutsches Institut für Wirtschaftsforschung, (2011) ; Nr. 1106, S. 1-25
ISSN: 1433-0210
Zeitschriftenaufsatz / Fach: Wirtschaftswissenschaften
Fakultät für Wirtschaftswissenschaften » Fachgebiet Volkswirtschaftslehre » Makroökonomik
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 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. a 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.