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Austerity and competitiveness in the Eurozone: a misleading linkage

Paternesi Meloni, Walter (2016): Austerity and competitiveness in the Eurozone: a misleading linkage.

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After a preliminary focus on increasing government debts, the debate on the “Eurozone crisis” switched over persistent external imbalances - both trade and net foreign assets - among European Monetary Union country members. Endorsing a pure neoclassical view, current account differentials were almost exclusively ascribed to weak price competitiveness of deficit countries (the so called Euro Area periphery), neglecting both demand-side factors and the structural productive asymmetries of the EMU. As a consequence, policy makers decided to impose austerity measures to peripheral countries in order to foster their competitiveness, and consequently to correct external imbalances by means of increasing export - while current accounts realignment mainly occurred due to decreasing import. In this paper, we identify this view as competitive austerity, in parallel with the debated expansionary austerity. According to their proponents, these policies would have a direct impact on trade balances and expansionary effects on real output and employment. By contrast, from an alternative standpoint fiscal restraints can be generally considered as counterproductive. In this perspective, following Keynesian arguments the aim of this paper is to critically assess the austerity-competitiveness linkage from a theoretical perspective. Moreover, some macroeconomic evidences are suggested to evaluate both effectiveness on external positions and real side-effects of austerity policies.

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