External Imbalances in EMU. Reforms, Austerity and Funding

Abstract

The paper is about external imbalances in the EMU, from the euro’s inception on. This lapse of time - 2000-14 - has been divided into three periods each of them defined on the basis of what is deemed to be the-moment-prevailingtheoretical scheme: the competitiveness model, the excess of savings or insufficient domestic demand, the change of International Investment Position, or BoP funding. The first period (2000-06) highlights the crucial importance of structural reforms to address - in normal situations - member states’ competitiveness losses. Consequences and cures of the 2007-2010 external imbalances have been heavily affected by the austerity policies. Finally the third episode of the BoP imbalances has been discussed on the basis of a very peculiar institutional mechanism designed to fund, when the national banking system needs it, the intra-eurozone transactions, or TARGET2. Theoretical schemes of the external imbalances episodes are identified on the basis of undisputable aspects and not according to econometric estimates, as they could bring to the wrong conclusion. (McKinnon [2013]. The external imbalance topic is one of the most interesting and complex problems of an incomplete monetary union, such as the EMU. Indeed, all the papers dealing with “external imbalances in EMU” more or less implicitly maintain that we have to do with a true monetary union. Still more important is, according the paper, the interaction between external imbalances and the EMU policies and institutional framework, which is usually ignored, as though it were unimportant. This paper aims at detecting the crucial role that policies and institutional aspects assume in defining causes, consequences and cure of external imbalances. In a word: in defining the right model of imbalances. This is particularly important when we talk about monetary union. But this aspect has been utterly overlooked. This paper aims at filling this lack. In particular we also try to elucidate links between structural reforms, austerity and current account imbalances.