Progress Towards External Adjustment in the Euro Area Periphery and the Baltics
32 Pages Posted: 14 Aug 2014
Date Written: July 2014
The euro area periphery countries and the Baltic countries, which had large current account deficits in the run-up to the crisis, needed adjustment of relative prices to achieve both internal and external balances. Thus far, tangible progress has been made through lower wages and/or higher productivity relative to trading partners (“internal devaluation”), which contributed to narrowing current account deficits and shifting output towards the tradables sector. While some early adjusters cut wages more rapidly followed by productivity improvement, others have only slowly improved productivity largely through labor shedding. This adjustment for most countries has come along with a substantial recession as the unit labor cost improvement has largely come from falling employment and much of the current account improvement from import compression. Going forward, these countries still need to generate growing tradables sector employment and to continue adjustment to prevent imbalances from returning as output gaps close.
Keywords: Current account deficits, Euro Area, Baltics, Price adjustments, Unit labor cost, Wage adjustments, Unemployment, Current account deficit, Internal devaluation, Competitiveness, current account, employment, unemployment rates, current account balances, recession, current account adjustment, high unemployment rates, unemployment rate, high unemployment, current account imbalances, labor market, labor productivity, full employment, balance of payment, employment decline, labor force, employment growth, labor force survey, number of employees, current account adjustments, employment losses, employment data, equilibrium unemployment, balance of payment statistics
JEL Classification: F24, F32, F41
Suggested Citation: Suggested Citation