In search of a new equilibrium: macroeconomic imbalances in the Eurozone

The book shows that the recent correction of negative imbalances in the current accounts of the large majority of peripheral Member States in the euro area is mainly due to a recession-driven decrease in imports, monetary wage compression, and below-average rates of inflation. This re-equilibrating process led to short-term adjustments, but it has not corrected the structural competitiveness gaps that built up inside the euro area during the first decade of its life (1999-2007) due to the inefficient allocation of financial flows from the European central economies to the peripheral ones. Contrary to the predictions of the standard macroeconomic models based on the "catching-up" mechanism, these financial flows did not adequately foster the productivity of lagged Member States in the euro area. Our proposal is to replace the "invisible hand" of the market with the "visible hand" of a European policy project. We argue that an effective policy initiative would have to combine a programme of European public and private investments with "contractual arrangements" for implementing crucial national reforms. This strategy might provide a short-term positive demand shock as well as strengthen the long-term structural competitiveness of the peripheral Member States without involving direct financial transfers, but allowing an intergovernmental cooperation and a trust-building process under the control of European institutions.