Munich Personal RePEc Archive

Cross-border finance, trade imbalances and competitiveness in the euro area

Gabrisch, Hubert (2015): Cross-border finance, trade imbalances and competitiveness in the euro area.

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Abstract

The nearly exclusive explanation for current account imbalances in the euro area blames real economy differences between countries, prominently the competitiveness of the participating states. This essay questions the common opinion that wage policy is crucial for rebalancing the European economies. This essay attempts to unfurl the real economy processes from the perspective of money and finance. This essay identifies an interregional asset-price-interest mechanism at work in the monetary union: A general change in the state of confidence provokes asset prices and the effective long-run interest rate to change and to affect aggregate demand and trade flows. A change in competitive positions of countries follows as the second-round effect. The policy implications prefer a downscaling of the financial sector against government interventions into wage formation.

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