## Euro Area: An Unbalanced Rebalancing?

_IMF Blog, July 22, 2014_

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**Canonical URL:** [Euro Area: An Unbalanced Rebalancing?](https://www.imf.org/en/blogs/articles/2014/07/22/euro-area-an-unbalanced-rebalancing)

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## Bibliographic details
- Authors: John Bluedorn, Shengzu Wang
- Published: July 22, 2014

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### Current account overview
- Since the financial crisis, the euro area current account has moved from rough balance into a clear surplus.
- Rebalancing across economies within the euro area has been highly asymmetric:
  - Debtors such as Greece, Ireland, and Spain have seen large current account improvements (sometimes into surplus).
  - Creditors such as Germany and the Netherlands have basically maintained their surpluses.

### A turning point in competitiveness?
- Many debtor economies have seen unit labor costs decline, improving competitiveness and boosting current accounts.
- Recent competitiveness gains in euro area debtor economies are largely driven by declining unit labor costs (Tressel and others, 2014; Tressel and Wang, 2014).
- Composition of labor-cost declines in specific debtors:
  - Greece and Ireland: labor cost declines due to a roughly equal mix of declining wages and employment.
  - Spain: labor cost declines due to declining employment.
- These competitiveness improvements have been accompanied by declining domestic demand and rising unemployment.
- Key question raised: when domestic demand recovers in these economies, will current account deficits re-emerge?

### Too much thrift? (creditor behavior)
- Many creditor economies have had large and persistent surpluses, driven by both higher saving and lower investment.
- Germany:
  - Both private (corporate and household) and public saving rose over the past decade, contributing to an overall saving rise of 4 percent of GDP.
- Overall euro area investment declined by about 3 percent of GDP, from 20 percent of GDP in 2001 to about 17 percent in 2012.
- Netherlands:
  - Declines in both overall saving and investment, but the investment decline was larger (from about 21 percent of GDP in 2001 to about 17 percent in 2012).
  - The Netherlands’ larger surplus is entirely due to the corporate sector.
- Conclusion: Restrained domestic demand (high saving and low investment) is part of the story behind persistent surpluses in creditor economies.

### Macro implications and interactions
- Large and persistent surpluses in creditor economies contribute to a stronger euro, which:
  - Makes it tougher for euro area debtor economies to adjust.
  - Exacerbates the external competitiveness gap facing debtor economies.
  - Contributes to weak euro area inflation (the “lowflation” environment).
- The observed rebalancing appears “unbalanced,” relying heavily on:
  - Anemic domestic demand in debtor economies.
  - Restrained domestic demand in creditor economies.
- Appropriate adjustment requires policies that achieve both:
  - Internal balance (reducing output gap and unemployment).
  - External balance (a more sustainable current account).

### Policy recommendations
- Boost investment in creditor economies.
- Implement structural reforms to raise productivity in all euro area economies through:
  - Further liberalization of product and service markets.
  - Reforms to make labor markets more flexible.
- These policies would:
  - Raise potential growth across the board.
  - Help output gaps close faster.
- Breaking out of the current “lowflation” environment would ease adjustment by opening up space for faster relative price changes within the euro area.

*John Bluedorn and Shengzu Wang, July 22, 2014.*

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## Content in this bundle

- **Country Report**
  - [Country Report (Markdown version)](/external/pubs/ft/scr/2014/cr14199.pdf.md){rel="alternate" type="text/markdown"}
  - [Country Report (PDF)](/external/pubs/ft/scr/2014/cr14199.pdf){rel="external" type="application/pdf"}
- **Staff Discussion Note**
  - [Staff Discussion Note (Markdown version)](/external/pubs/ft/sdn/2014/sdn1407.pdf.md){rel="alternate" type="text/markdown"}
  - [Staff Discussion Note (PDF)](/external/pubs/ft/sdn/2014/sdn1407.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/wp-content/uploads/2014/07/euro-area-current-account-chart1.jpg](https://www.imf.org/wp-content/uploads/2014/07/euro-area-current-account-chart1.jpg)
- [Tressel and Wang](http://www.imf.org/external/pubs/cat/longres.aspx?sk=41770.0)
- [https://www.imf.org/wp-content/uploads/2014/07/euro-area-current-account-chart2rev1.jpg](https://www.imf.org/wp-content/uploads/2014/07/euro-area-current-account-chart2rev1.jpg)
- [https://www.imf.org/wp-content/uploads/2014/07/euro-area-current-account-chart3rev1.jpg](https://www.imf.org/wp-content/uploads/2014/07/euro-area-current-account-chart3rev1.jpg)
- [lowflation](https://blogs.imf.org/2014/03/04/euro-area-deflation-versus-lowflation/)

_Source: https://www.imf.org/en/blogs/articles/2014/07/22/euro-area-an-unbalanced-rebalancing_