External and Macroeconomic Adjustment in the Larger Euro‐Area Countries

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The paper is released in order to make the research of CompNet generally available, in preliminary form, to encourage comments and suggestions prior to final publication. The views expressed in the paper are the ones of the author(s) and do not necessarily reflect those of the ECB, the ESCB, and of other organisations associated with the Network. Terms of use: Documents in EconStor may AcknowledgementsWe are grateful for the insightful comments by L. Dedola, A. Dieppe, G. Kenny, G. Lombardo, M. Rubaszek, F. Smets as well as participants of ECB and ESCB seminars. The views expressed are those of the authors and do not necessarily reflect those of the ECB. Elena AngeliniEuropean Central Bank; e-mail: elena.angelini@ecb.europa.euMichele Ca' Zorzi European Central Bank; e-mail: michele.cazorzi@ecb.europa.eu Katrin ForsterEuropean Central Bank; e-mail: katrin.forster@ecb.europa.eu AbstractA balanced current account in the euro area has disguised sizeable net lending imbalances at the country level, exposing the common currency area to severe pressures during the …nancial crisis.The key contribution of this paper is to evaluate the adjustment process through the lenses of the New Multi Country Model at the country and sectoral level. We …nd that shocks to the external, …scal and monetary environment help explain, to a large degree, the sizable current account adjustment and rise in unemployment in Spain. The model also suggests that a recovery in wage competitiveness helps to reduce external de…cits at the cost of higher net borrowing by households. The stimulus e¤ects on aggregate demand, via the interest rate response of the common monetary authority and the competitiveness channel, are present but not overly large, as the rebound in economic activity depends mainly on global demand, supportive monetary policy, business and consumer con…dence.Key words: net lending, euro area countries, current account, modeling JEL Classi…cation: C5, F32, F41, O52. NON-TECHNICAL SUMMARYThe current account in the euro area has historically been close to balance. The presence of de…cits and surpluses across the di¤erent participating members was not generally perceived as a major policy issue, as e.g. the Spanish de…cit was o¤set by the German surplus (Williamson, 2007).The sizable net borrowing by the euro area public sector was instead o¤set by the net savings of the euro area private sector. Following the …nancial crisis the academic literature has moved from a largely beni...