External Adjustment with a Common Currency: The Case of the Euro Area

40 Pages Posted: 9 Nov 2019

Date Written: November 8, 2019


This paper analyzes the behaviour of the external adjustment path for the four main economies in the euro area. I find a structural break in the behaviour of the net external position at the time of the introduction of the euro for France, Italy and Spain, pointing out that the inception of the common currency changed their external adjustment process. Germany does not show this structural break, being its external position more affected by other events such as the country reunification in 1989. I also find that France and Italy will adjust the net external position mainly through the valuation component, while Germany and Spain will restore their external balance mostly through the trade component. The common currency area could have exacerbated Germany’s net creditor position as the evolution of the euro has reacted to the external adjustment needs of debtor countries such as Italy and Spain.

Keywords: external adjustment, exchange rate regime, structural breaks, valuation adjustment

JEL Classification: F31, F33

Suggested Citation

Fuertes, Alberto, External Adjustment with a Common Currency: The Case of the Euro Area (November 8, 2019). Banco de Espana Working Paper No. 1936 (2019), Available at SSRN: https://ssrn.com/abstract=3483510 or http://dx.doi.org/10.2139/ssrn.3483510

Alberto Fuertes (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014

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