Adjustment in Euro Area Deficit Countries: Progress, Challenges, and Policies
( IMF Staff Discussion Notes )
Publication series ： IMF Staff Discussion Notes
Author： Mr. Thierry Tressel Mr. Shengzu Wang Joong Shik Kang Jay C. Shambaugh Mr. Jörg Decressin Petya Koeva Brooks
Publisher： INTERNATIONAL MONETARY FUND
Publication year： 2014
E-ISBN: 9781498309110
P-ISBN(Paperback): 9781498373814
Subject： F82 currency
Language： ENG
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Description
Imbalances within the euro area have been a defining feature of the crisis. This paper provides a critical analysis of the ongoing rebalancing of euro area deficit economies (Greece, Ireland, Portugal, and Spain) that accumulated large current account deficits and external liability positions in the run-up to the crisis. It shows that relative price adjustments have been proceeding gradually. Real effective exchange rates have depreciated by 10-25 percent, driven largely by reductions in unit labor costs due to labor shedding. While exports have typically rebounded, subdued demand accounts for much of the reduction in current account deficits. Hence, the current account balance of the euro area as a whole has shifted into surplus. Internal rebalancing has come with subdued activitynotably very high unemployment in the deficit economiesand made continued adjustment more difficult. To advance rebalancing further, the paper emphasizes the need for: (1) macroeconomic policies that support demand and bring inflation in line with the ECBs medium-term price stability objective; (2) continued EMU reforms (banking union) to ensure proper financial intermediation; and (3) structural reforms in product and labor markets to improve productivity and support the reallocation of resources to tradable sectors.
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