JEL Code: F32

Gunther Schnabl

Abstract

The paper scrutinizes the role of diverging fiscal policy stances for diverging current account positions in Europe with a focus on the European Monetary Union (EMU). In a heterogeneous monetary union fiscal policy has the task to absorb asymmetric shocks to ensure the efficacy of the one-size monetary policy. It is argued that since the early years of the European Monetary Union divergent fiscal policies combined with monetary expansion constituted a major determinant of current account divergence within the euro area, which finally led into the European debt and financial crisis. Panel regressions reveal a significant impact of fiscal policies on current account positions, which to a large extent are independent from the exchange rate regime and turn out to be contingent on monetary and fiscal policy mix. Based on the findings economic policy recommendations are presented.

Keywords: current account imbalances, Europe, European financial and debt crisis, European Monetary Union, exchange rate adjustment, fiscal policy, macroeconomic policy coordination.

JEL Codes: F32, F33, F42, H62.

Erschienen in

The Economists’ Voice, vol. 15, no. 1, 2018, pp. 20180026.

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Ansgar Belke; Ulrich Haskamp; Gunther Schnabl; Holger Zemanek

Abstract

We scrutinize the role of capital flows for competitiveness in seven euro-area countries in the context of real convergence and crisis with a specific focus on Greece. The paper extends the seminal Balassa-Samuelson model to include international capital markets. Capital flows are assumed to be able to invert the traditional direction of transmission of real wage increases from the tradable to the non-tradable sector and to cause real wages to increase beyond productivity increases. Panel estimations for the period from 1995 to 2013 show evidence in favour of capital inflow-driven real wage increases in excess of productivity increases in Greece.

Keywords: Balassa-Samuelson Effect, capital inflows, Estonia, exchange rate regime, Greece, inflation, Latvia, Lithuania, panel model, Portugal, productivity differential, Slovak Republic, Slovenia, wages.

JEL Codes: E24, F16, F31, F32.

Erschienen in

CESifo Working Paper No. 5557 (October 2015).

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