Quantifying and Correcting Eurozone Imbalances Fighting the Debt Snowball

Vistesen, Claus (2010): Quantifying and Correcting Eurozone Imbalances Fighting the Debt Snowball. Unpublished.

Abstract

This paper quantifies and discusses the concept of current account imbalances in the Eurozone. Using panel data estimations, the analysis shows how the external positions of the Eurozone economies can be modelled as a function of divergences in unit labour costs. Specifically, the results indicate that the formation of EMU has exacerbated the extent to which even relatively small divergences in unit labour costs may materialize in large current account imbalances. These results are framed in the context of the idea of a debt snowball effect and why the idea of an internal devaluation as a tool to correct external imbalances is inconsistent with the current setup of the Eurozone.

• Item Type: MPRA Paper
• Language: English
• Keywords: The Eurozone; Debt snowball; Current Account Imbalances; EMU
• Subjects: E - Macroeconomics and Monetary Economics > E0 - General > E02 - Institutions and the Macroeconomy; F - International Economics > F0 - General > F02 - International Economic Order; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs; H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt; Debt Management

References

Ahearne, Alan and Ferry-Pisani, Jean (2006) – The Euro: Only for the Agile, Bruegel Policy Brief 2006/01

Altonji , Joseph G. and Devereux Paul J. (1999) – The Extent and Consequences of Downward Nominal Wage Rigidity, NBER Working Paper no 7236

Blanchard, Oliver (2007) – Adjusting to the Euro: The Difficult Case of Portugal, Portugal Economic Journal 6, 1-21

Bibow, Jörg (2009) – The Euro and its Guardian of Stability: Fiction and Reality of the 10th Anniversary Blast,IEPI.Laurentian, working paper 2009-15.

Cabral, Richard (2010) – The PIGS’ External Debt Problem, 8 May 2010 VOXEU.org Research Article

Calmfors, Lars (1998) – Macroeconomic Policy, Wage Setting, and Employment – What Difference does the EMU Make, Oxford Review of Economic Policy 14(3) pp. 125-151

Calmfors, Lars (2003) – Fiscal policy to stabilise the domestic economy in the EMU: What can we learn from monetary policy? CESifo Economic Studies 2003 49(3):319-353

Dessy, Orietta (2005) – Nominal Wage Rigidity in Europe: estimates and institutional causes, Working Paper n. 2005-09 Università degli Studi di Milano (Dipartimento di Scienze Economiche, Aziendali e Statistiche)

Feldstein Martin (2010) – Why Greece Will Default, Project Syndicate article April 2010

Greene, William H (2003) – Econometric Analysis, 5th Edition Prentice Hall

Gujarati, Damodar (2003) – Basic Econometrics, McGrawHill, 4th Edition

Holden, Steinar and Wulfsberg (2007) – Downward Nominal Wage Rigidity in the OECD, ECB Working Paper no. 777

Hugh, Edward (2010) – The Debt Snowball Problem, Afistfulofeuros Jan 15th 201029

Knoppik, Christoph and Beissinger Thomas (2009) – Downward nominal wage rigidity in Europe: an analysis of European micro data from the ECHP 1994–2001, Empirical Economics, Volume 36, Number 2 / May, 2009

Lebow, David E; Saks, Raven E and Wilson, Anne Beth (2003) – Downward Nominal Wage Rigidity:Evidence from the Employment Cost Index, Advances in Macroeconomics: Vol. 3 : Iss. 1, Article 2

Mundell, Robert (1961) – A theory of Optimum Currency Areas, The American Economic Review vol. 51, no. 4 (Sep., 1961) pp. 657-665

Puhani, Patrick A (1999) – Labour Mobility: An Adjustment Mechanism in Euroland, Centre for European Economic Research (ZEW) Mannheim

Schmidt Birgit, & Hagen von, Jürgen (2009) – Current Account Imbalances and Financial Integration in the Euro Area, CEPR Discussion Paper no. 7262 (April 2009) 29 http://fistfulofeuros.net/afoe/economics-and-demography/the-debt-snowball-problem/

Smidt, Frank & Hansen Øland, Frank (2010) – Debt on a dangerous path, Danske Bank Research note Jan 4th 201030

Zelmanek, Holger, Belke, Ansgar, and Schnabl, Gunther (2009) – Current Account Imbalances and Structural Adjustment in the Euro Area: How to Rebalance Competitiveness, CESifo Working Paper no. 2639