Macroeconomic imbalances and competitiveness in the euro area

Abstract

This article challenges the new revisionist consensus, whereby current account imbalances have caused the euro crisis. In a monetary union, current accounts are not useful indicators for macroeconomic imbalances, because a currency area is not a fixed exchange rate system. It is a payment union and it is therefore more appropriate to analyse the flow of funds and payments between sectors and Member States. Applying the analysis, it turns out that excessive lending in the north has financed the borrowing in the south, thereby contributing to unequal development in the euro area. To remedy this situation, incentives for competitive investment need to be adjusted. The article describes an innovative approach for determining equilibrium unit labour costs as a benchmark for stable and fair wage setting. It then discusses policy implications and recommends better wage coordination between European trade unions.