Rebalancing in the Euro Area and Cyclicality of Current Account Adjustments

32 Pages Posted: 14 Aug 2014

See all articles by Thierry Tressel

Thierry Tressel

International Monetary Fund (IMF) - Research Department

Shengzu Wang

International Monetary Fund (IMF) - Asia and Pacific Department

Date Written: July 2014

Abstract

The paper examines progress with the external rebalancing of euro area deficit countries. Relative prices are adjusting at different pace across countries and with different compositions of wage cuts and labor shedding. There is so far limited evidence of resource re-allocation from non-tradable to tradable sectors, while improved export performance is still dependent on external demand from the rest of world. Current account adjustments have taken place, reflecting structural changes but also cyclical forces, suggesting that part of the improvements may unwind when cyclical conditions improve. Looking ahead, relying only on relative price adjustments (which adversely affects demand) to rebalance the euro area could prove very challenging. Structural reforms will play an important role in the reallocation of resources to the tradable sector and the associated relative price adjustment, while boosting non-price and price competitiveness.

Keywords: Current account, Euro Area, Export performance, Demand, Export competitiveness, Price adjustments, Rebalancing, Imbalances, Euro Area., export growth, reer, debtor countries, current accounts, exports of goods, service exports, unit labor costs, current account adjustments, export demand, total exports, capital flows, current account adjustment, share of exports, real export growth, current account balances, current account deficits, real export, central bank, private credit, net external liabilities, real exports, export prices, current account balance, external liabilities, merchandise exports, exporter, real effective exchange rate, current account deficit, export deflator, net exporters,

JEL Classification: F10, F14, P51

Suggested Citation

Tressel, Thierry and Wang, Shengzu, Rebalancing in the Euro Area and Cyclicality of Current Account Adjustments (July 2014). IMF Working Paper No. 14/130. Available at SSRN: https://ssrn.com/abstract=2480279

Thierry Tressel (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Shengzu Wang

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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