Macroeconomic Imbalances in the Euro Area and policy intervention: the role of trade with emerging economies

The aim of this paper is to evidence the benefits of a coordinated and symmetrical policy approach in the reduction of macroeconomic imbalances among Eurozone countries by analysing the exploitation of the trade potential with emerging economies as an instrument to reduce such imbalances. To this end we estimate potential trade flows with the group of BRICs and calculate the effect on both trade and current account balances. The results indicate that for the main economies, such as France, Italy and Spain, a coordinated and symmetrical policy intervention in order to increase competitiveness and exploit the trade potential with BRICs will cause substantial improvements in their trade balances. In addition, by means of panel estimates we find a direct effect of net trade increases on public debt reductions in Italy and France. Hence, we conclude that coordinated and symmetrical measures to improve the competitiveness of deficit countries can be a substitute for austerity policies to reduce the debt to GDP ratio in Southern Europe.