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5 - Macroeconomic Imbalances in the Euro Area

Can They Be Managed?

from Part II - Macroeconomic Implications of Reforms

Published online by Cambridge University Press:  31 March 2020

By
Michael Hume
Edited by
Nauro F. Campos ,
Paul De Grauwe  and
Yuemei Ji
Nauro F. Campos
Affiliation:
University College London
Paul De Grauwe
Affiliation:
London School of Economics and Political Science
Yuemei Ji
Affiliation:
University College London
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Summary

Over recent years, a consensus has emerged that 'policy failures that allowed imbalances to get so large' were probably the main root cause of the Euro area crisis.Reflecting this, the new Euro area governance arrangements include a Macroeconomic Imbalances Procedure (MIP) that seeks to identify and take corrective action against emerging imbalances.This chapter uses a Bayesian structural VAR model to assess the feasibility of managing macroeconomic imbalances in the Euro area using four macroeconomic policy tools:fiscal policy, macroprudential policy, product market structural reforms and labour market reforms.Consistent with the emerging literature, it finds that managing macroeconomic imbalances is likely to be difficult.However, it raises the tantalising prospect that a combination of eliminating structural rigidities before macroeconomic imbalances arise plus using macroprudential policy to manage emerging macroeconomic imbalances could be effective.

Keywords

macroeconomic policycurrent accountEMUmonetary unionmacroeconomic imbalancesmacroeconomic adjustmentstructural reformsfiscal policymacroprudential policy
Type
Chapter
Information
Economic Growth and Structural Reforms in Europe , pp. 141 - 176
Publisher: Cambridge University Press
Print publication year: 2020

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