Wednesday, September 5, 2012

The limits of a purely intra-euro rebalancing strategy

by Zsolt Darvas


September 5, 2012

The need to rebalance the debts of several Eurozone members is a major root of the current crisis. This column argues that a purely intra-euro rebalancing strategy has its limits and that a weaker euro would help. It urges the European Central Bank to adopt looser monetary policy, which is anyway justified in a highly recessionary environment.

The perceived failure of Greece, Portugal, and Spain to achieve sustainable external positions and economic growth inside the Eurozone is a major factor behind the current crisis. Their trade deficits should be turned to sizeable surpluses in which real exchange rate developments should play a role. Some adjustments, both in trade balances and real exchange rates, have already taken place in the past few years. Is the remaining adjustment a purely intra-Eurozone issue or does the external value of the euro play a role?


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