{
  "title": "Adjustment in Euro Area Deficit Countries: Progress, Challenges, and Policies",
  "publication": "Staff Discussion Notes, July 14, 2014",
  "sourceUrl": "https://www.imf.org/en/publications/staff-discussion-notes/issues/2016/12/31/adjustment-in-euro-area-deficit-countries-progress-challenges-and-policies-41716",
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  "summary": "Imbalances within the euro area have been a defining feature of the crisis. This paper provides a critical analysis of the ongoing rebalancing of euro area “deficit economies” (Greece, Ireland, Portugal, and Spain) that accumulated large current account deficits and external liability positions in t",
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    {
      "heading": "Overview",
      "content": "- Focus: Rebalancing of euro area “deficit economies” — Greece, Ireland, Portugal, and Spain — that accumulated large current account deficits and external liability positions before the crisis.\n- Main conclusion: Relative price adjustments have proceeded gradually, supporting rebalancing but accompanied by subdued activity and high unemployment in deficit economies."
    },
    {
      "heading": "Key findings",
      "content": "- Real effective exchange rates have depreciated by 10-25 percent.\n- Depreciation has been driven largely by reductions in unit labor costs due to labor shedding.\n- Exports have typically rebounded, but subdued demand accounts for much of the reduction in current account deficits.\n- The current account balance of the euro area as a whole has shifted into surplus.\n- Internal rebalancing has come with subdued activity and notably very high unemployment in the deficit economies, making continued adjustment more difficult."
    },
    {
      "heading": "Mechanisms of adjustment",
      "content": "- Relative price changes: gradual real depreciation in deficit countries (10-25 percent) via lower unit labor costs.\n- External channel: export rebounds have contributed to narrowing deficits.\n- Domestic demand channel: subdued domestic demand has been a major factor reducing current account deficits."
    },
    {
      "heading": "Costs and challenges",
      "content": "- Adjustment has been associated with subdued overall activity.\n- Very high unemployment in deficit economies poses social and economic constraints on further adjustment.\n- Continued rebalancing is made more difficult by weak demand and constrained financial intermediation."
    },
    {
      "heading": "Policy recommendations",
      "content": "- Macroeconomic policy:\n  - Support demand and bring inflation in line with the ECB’s medium-term price stability objective.\n- EMU reforms:\n  - Continue EMU reforms (banking union) to ensure proper financial intermediation.\n- Structural reforms:\n  - Implement structural reforms in product and labor markets to improve productivity and support reallocation of resources to tradable sectors.\n\nIMF Staff Discussion Note “Adjustment in Euro Area Deficit Countries: Progress, Challenges, and Policies” by Thierry Tressel, Shengzu Wang, Joong S Kang, Jay C Shambaugh, Jörg Decressin, and Petya Koeva Brooks, July 14, 2014.\n\n---\n\n Content in this bundle\n\n- sdn1407\n  - sdn1407 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - sdn1407 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/staff-discussion-notes/issues/2016/12/31/adjustment-in-euro-area-deficit-countries-progress-challenges-and-policies-41716"
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    "Authors: Thierry Tressel, Shengzu Wang, Joong S Kang, Jay C Shambaugh, Jörg Decressin, Petya Koeva Brooks",
    "Published: July 14, 2014",
    "Series: Staff Discussion Notes",
    "DOI: https://doi.org/10.5089/9781498373814.006",
    "Focus: Rebalancing of euro area “deficit economies” — Greece, Ireland, Portugal, and Spain — that accumulated large current account deficits and external liability positions before the crisis.",
    "Main conclusion: Relative price adjustments have proceeded gradually, supporting rebalancing but accompanied by subdued activity and high unemployment in deficit economies.",
    "Real effective exchange rates have depreciated by 10-25 percent.",
    "Depreciation has been driven largely by reductions in unit labor costs due to labor shedding.",
    "Exports have typically rebounded, but subdued demand accounts for much of the reduction in current account deficits.",
    "The current account balance of the euro area as a whole has shifted into surplus.",
    "Internal rebalancing has come with subdued activity and notably very high unemployment in the deficit economies, making continued adjustment more difficult.",
    "Relative price changes: gradual real depreciation in deficit countries (10-25 percent) via lower unit labor costs.",
    "External channel: export rebounds have contributed to narrowing deficits.",
    "Domestic demand channel: subdued domestic demand has been a major factor reducing current account deficits.",
    "Adjustment has been associated with subdued overall activity.",
    "Very high unemployment in deficit economies poses social and economic constraints on further adjustment.",
    "Continued rebalancing is made more difficult by weak demand and constrained financial intermediation.",
    "Macroeconomic policy:",
    "EMU reforms:",
    "Structural reforms:",
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