Macro-economic imbalances in the Eurozone

Abstract

With stagnating growth rates among a majority of its members, soaring unemployment figures and an increased risk of deflation, the economic conditions of the European economy do not strongly reflect a stronger and more united Europe as was intended by the monetary unification in 2001. On the contrary, the recent painstaking negotiations between Greece and its bailout creditors pushed Greece on the brink of leaving the Eurozone and seriously questioned the sustainability of the European monetary union. This research is an attempt to shed new light on the structural evolution of the main Eurozone economies in the years leading up to and following the monetary unification by means of a detailed data analysis using the recently released World Input-Output Database and adopting an inter-country input-output model. This database offers many insights in the productive structures of economies as well as the international interrelatedness in productive and demand structures. By empirically getting an appraisal on both the historal evolution and current structure of the Eurozone’s economy, this thesis furthermore aims at providing new lines of thought to the European policy makers in their search for industrial policy solutions to reduce the macro-economic imbalances and achieve a sustained recovery of the Eurozone economy. The first part of our findings basically all support the overall message that a substantial economic restructuring among the main Eurozone countries has been taking place in the last two decades. We collected various structural insights which all to a greater or lesser extent point out that the monetary unification in 2001 reinforced a process of structural divergence between mainly Germany and the peripheral, or Southern European, economies both in terms of their productive and trade structures and reflected on the surface by a growing divergence between their overall current account balances. Germany has gradually been intensifying its technological capabilities by building up a strong comparative advantage in the production and export of high and medium-high technology manufacturing goods, while the periphery has been technologically stagnant and got locked-up in specializing in low and medium-low tech manufacturing industries as well as several non-traded industries including construction and tourism to name just a few. The second part addresses the important question on how to deal with this structural problem, by presenting several broad policy suggests and lines of thought substantiated by empirical and theoretical arguments. These scenario’s include: laissez-faire (let the process happen without strongly interfering), introduce a Eurozone central fiscal stabilization mech- anism, and try to exploit intra-Eurozone trade spillovers. Especially this last scenario is care- fully empirically examined for the year 2011, the most recent year in the World Input-Output Database. A two-folded conclusion can be drawn from this analysis. Firstly, a ‘coordinated Eurozone-level domestic demand-led strategy’ (by targeted industrial and income policies) could potentially be beneficial in supporting a general sustained recovery of the recession in the Eurozone, because the empirical results reveal that the intra-Eurozone spillovers can significantly be exploited to increase the overall gains from coordinated action. Moreover, our analysis points out that stimulation of the manufacturing industries yields significant more benefits for each Eurozone country, in comparison to scenarios in which all industries would be stimulated. Secondly, with regards to reducing the macro-economic imbalances between the core and peripheral countries, our analysis suggests that it is not feasible to help re-balancing the Eurozone industrial structure by such spillover generating coordinated pro- grams of domestic public investments. The results of our stimulus scenarios clearly suggest that the intra-Eurozone spillover effects generate much smaller impacts on the peripheral countries while contributing much more to the core countries.