Atoyan, Ruben, Jonathan Manning, and Jesmin Rahman, 2013, “Rebalancing: Evidence from Current Account Adjustment in Europe,” IMF Working Paper, WP/13/74 (Washington: International Monetary Fund).
Bayoumi, Tamim, Richard Harmseen, and Jarkko Turunen, 2011, “Euro Area Export Performance and Competitiveness,” IMF Working Paper, WP/11/140 (Washington: International Monetary Fund).
Berger, Helge and Volker Nitsch, 2010, “The Euro’s Effect on Trade Imbalances,” IMF Working Paper, WP/10/226 (Washington: International Monetary Fund).
Blanchard, Olivier and Francesco Giavazzi, 2002, “Current Account Deficits in the Euro Area: The End of the Feldstein-Horioka Puzzle?” Brookings Papers on Economic Activity, vol. 2002, No. 2, pp. 147–186.
Borio, Claudio, Piti Disyatat and Mikael Juselius, 2013, “Rethinking Potential Output: Embedding Information about the Financial Cycle”, BIS Working Papers No. 404, Basel.
Chen, Ruo, Gian-Maria Milesi-Ferretti and Thierry Tressel, 2012, “External Imbalances in the Euro Area”, IMF Working Paper No. 12/236, Washington DC.
Christiansen, Lone, Prati, Alessandro, Ricci, Luca, and Thierry Tressel, 2009, “External Balance in Low Income Countries”, IMF Working Paper 09/221.
European Central Bank, “Competitiveness and External Imbalances within the Euro Area,” 2012, Occasional Paper Series No 139 (Frankfurt, Germany: European Central Bank).
Goyal, Rishi, Koeva Brooks, Petya, Pradhan, Mahmood, Tressel, Thierry, Dell’Ariccia Giovanni Pazarbazioglu Ceyla, 2013, “a Banking Union for the Euro Area”, IMF Staff Discussion Note 13/1.
Goldstein, Morris and Mohsin S. Khan, 1985, “Income and Price Effects in Foreign Trade”, Handbook of International Economics, vol. II, pp. 1041–1105.
International Monetary Fund, 2012, External Balance Assessment (EBA): Technical Background of the Pilot Methodology, www.imf.org/external/np/res/eba/pdf/080312.pdf.
Ivanova, Anna, 2012, “Current Account Imbalances: Can Structural Policies Make a Difference?” IMF Working Paper, WP/12/61 (Washington: International Monetary Fund).
Jaumotte, Florence, and Piyaporn Sodsriwiboon, 2010, “Current Account Imbalances in the Southern Euro Area,” IMF Working Paper, WP/10/139 (Washington: International Monetary Fund).
Kang, Joong Shik and Jay C. Shambaugh, 2013, “The Evolution of Current Account Deficits in the Euro Area Periphery and the Baltics: Many Paths to the Same Endpoint”, IMF Working Paper Wp/13/169.
Laeven, Luc and Thierry Tressel, 2013, “The European Union: Financial Integration and Fragmentation in the European Union”, European Union Financial Sector Assessment Program Technical Note, IMF Country Report No. 13/71, March 2013.
Lane, Philip R., 2006, “The Real Effects of European Monetary Union”, Journal of Economic Perspectives, vol. 20, No. 4, pp. 47–66.
Lee, Jaewoo, Milesi-Ferretti, Gian-Maria, Ostry, Jonathan, Prati, Alessandro, Ricci, Luca, 2008, “Exchange Rate Assessments: CGER Methodologies”, IMF Occasional Paper 261.
Nkusu, Mwanza, 2013, “Boosting Competitiveness to Grow Out of Debt—Can Ireland Find a Way Back to Its Future?” IMF WP 13/35 (Washington: International Monetary Fund).
Phillips, Steven, Luis Catão, Luca Ricciet Rudolfs Bems, Mitali Das, Julian Di Giovanni, D. Filiz Unsal Marola Castillo, Jungjin Lee, Jair Rodriguez and Mauricio Vargas, 2013, “The External Balance Assessment Methodology”, IMF WP 13/172, (Washington: International Monetary Fund).
- Search Google Scholar
- Export Citation
)| false , Phillips, Steven, Luis Catão, Luca Ricciet Rudolfs Bems, Mitali Das, Julian Di Giovanni, D. Filiz Unsal Marola Castillo, Jungjin Lee, Jair Rodriguezand Mauricio Vargas 2013, “ The External Balance Assessment Methodology”, IMF WP 13/172, ( Washington: International Monetary Fund).
Tressel, Thierry and Shengzu Wang, 2013, “Rebalancing the Euro Area: Where do We Stand and Where to go?” Selected Issues Papers (Washington: International Monetary Fund).
Tressel, Thierry, Shengzu Wang, Joong Shik Kang, and Jay Shambaugh, directed by Jorg Decressin and Petya Koeva Brooks, 2014, “Adjustment in Euro Area Deficit Countries: Progress, Challenges and Policies”, IMF Staff Discussion Note 14/07, (Washington: International Monetary Fund).
- Search Google Scholar
- Export Citation
)| false , directed by Jorg Decressin and Petya Koeva Brooks, 2014, “ Tressel, Thierry, Shengzu Wang, Joong Shik Kang, and Jay Shambaugh Adjustment in Euro Area Deficit Countries: Progress, Challenges and Policies”, IMF Staff Discussion Note 14/07, ( Washington: International Monetary Fund).
The authors would like to thank Petya Koeva Brooks, Mahmood Pradhan and Jorg Decressin for their useful comments and suggestions. The authors also thank Celine Allard, Shekhar Aiyar, seminar participants at the European Central Bank, at the European Commission, at the IMF surveillance committee and other colleagues for useful comments and suggestions.
We focus on these five countries while acknowledging and documenting differences between these countries. In contrast to the other countries, Italy did not have a large current account deficit to GDP ratio at the start of the crisis, and had modest net foreign liabilities in percent of GDP but these are still large in absolute terms. In this paper, we follow Chen et al. (2012) and include Italy in the country sample.
If measured by relative CPI, real exchange rate adjustments have been moderate in spite of wage declines in some countries (in particular in Ireland and Greece). If measured by GDP deflators, they have been more substantial. Moreover, relative price adjustments have more substantial relative to non-euro area trading partners than relative to euro area trading partners reflecting the weakness of domestic prices in the euro area during the period. In spite of some relative price adjustments at the sectoral levels, there is thus far and in general limited evidence of resource re-allocation from non-tradable to tradable sectors, suggesting that the internal rebalancing is only very slowly taking place.
The paper by Kang and Shambaugh (2014) is close to ours, and they also document the relative adjustment that the euro area deficit countries are undertaking. But our paper is focusing more on analyzing progress with the internal reallocation of production and with export competitiveness.
See “Update of Staff Sustainability Assessments for G-20 Mutual Assessment Process (September 2013)” for more detailed discussion (http://www.imf.org/external/np/g20/map2013.htm).
Value-added REER (or similarly GDP deflator-based REER) REER are good proxies for value-added REER that reflect the vertical integration of trade. See Bems and Johnson (2012) for detailed discussion.
See for instance, Kang and Shambaugh (2014) that adopt such a definition, and find that tradables output has expanded relative to non-tradables output in Ireland, Portugal, and Spain, but not in Greece.
Following ECB (2012), manufacturing is used as a proxy for traded sector, and non-traded sectors include construction, whole sale and retail, hotel, transportation.
The text box provides some empirical evidence for non-price factors on export growth for euro area countries. The appendix also provides a definition of traded and non traded sectors.
Evidence from bank credit in Ireland and Spain suggests however a sharper decline in the non-tradable sectors and recent data point to a pick-up of credit in the tradable sector.
It is also worth noticing that labor shares in the gross value-added have been declining in the past decade in the euro area, with sharp spikes during the 2008/09 crisis period when output and trade collapsed. In the deficit countries such as Spain, labor share has been declining since the crisis, reflecting both labor shedding and rising profit margins in the tradable sectors.
Earlier research however found that a significant decline of market shares took place between 1996 and 1999 (IMF, 2008).
For example, in 2007–8, about ¼ of Germany’s exports of goods went to emerging Asia.
In this paper we rely on the elasticities estimated by Chen et al. (2012). Using alternative price and demand elasticities (such as for instance those estimated by Bayoumi, Hansern and Turunen (2011)) would lead to quantitatively similar conclusions.
Also note that estimating the CA as a function of REER and other variables would be inappropriate (as would estimating the REER as a function of CA), since the system above implies that CA and REER are both endogenous and simultaneously determined as a function of other variables.
See for instance Christiansen et al. (2008), and Reinhardt, Ricci and Tressel (2013).
Kang and Shambaugh (2014) found larger contributions of cyclical factors, using alternative methods to measure the output gap. Borio et al. (2012) analyze how indicators of financial cycles may help improve the accuracy of the measured output gap.
Catao and Milesi-Ferretti (2013) find that the ratio of net foreign liabilities to GDP is a significant predictor of crisis in a large sample of countries.
It is also interesting to see that Greece’s top three competitors in the world market are Spain, Portugal, and Italy, with very low correlations of trade specialization with China or Hong Kong.