OECD Economics Department Working Papers

ISSN :: 1815-1973 (online)
DOI :: 10.1787/18151973

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Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

Policy Options to Durably Resolve Euro Area Imbalances

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Authors:

Yvan Guillemette¹, David Turner

Author Affiliations

1: OECD, France

Publication Date

20 Mar 2013

Bibliographic information

No.:: 1035

Pages

DOI

10.1787/5k49lcnzkn20-en

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A simple econometric framework is presented linking current account balances of euro area countries to intra and extra euro area competitiveness, cyclical positions, fiscal positions and the oil price. The framework is then used to cyclically-adjust observed current account balances and illustrate the scale of the additional adjustments to competitiveness and/or fiscal balances required in the euro area periphery to bring structural current account balances to levels compatible with sustainable net external debt levels. In Spain and Portugal, cost competitiveness relative to the rest of the euro area would need to improve by about 30%, and by more than twice that in Greece. In peripheral countries, a combination of structural reforms to boost productivity and enhance the flexibility of labour markets, ambitious fiscal consolidation and reductions in labour taxes could substantially facilitate the rebalancing process and reduce the extent to which the burden of adjustment is reliant on further prolonged demand weakness. Surplus and/or strong competitiveness countries could help by likewise making labour and product markets more flexible, accepting above-normal inflation for an extended period and boosting demand, perhaps through reduced fiscal austerity.

Keywords:: Italy, external debt, unit labour costs, competitiveness, Ireland, imbalances, euro area, Greece, periphery, Spain, current accounts, Germany, Portugal

JEL Classification:

E61: Macroeconomics and Monetary Economics / Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook / Policy Objectives; Policy Designs and Consistency; Policy Coordination
F32: International Economics / International Finance / Current Account Adjustment; Short-Term Capital Movements
F34: International Economics / International Finance / International Lending and Debt Problems
J31: Labor and Demographic Economics / Wages, Compensation, and Labor Costs / Wage Level and Structure; Wage Differentials