The European balance of payments problem

Abstract

The present thesis provides a qualitative study of the European balance of payments imbalances. The years prior to the global financial crisis, there has not been given particular attention to the development of imbalances. However, nowadays, they constitute the hottest issue facing both economists and policymakers. Macroeconomic imbalances refer to situations where variables are out of equilibrium for an extended period of time and they may pose risks to the economy. Since the inception of the European Monetary Union, while the current account of the entire euro area has remained balanced, euro area countries have experienced sizeable deficits or surpluses. Moreover, several member countries have accumulated extremely high public debt levels during the European sovereign debt crisis. As a result of these diverging macroeconomic developments, the project of European Union is threatened. During the crisis, important measures have been taken in order to correct these imbalances and lay the foundation for a stronger and more resilient union. However, more steps to this direction are needed. The current thesis takes into consideration the increase in the intra-euro area imbalances since the introduction of the single currency, investigating their causes and their role in the current European debt crisis and ends up in discussing some policy proposals, which will facilitate the adjustment process and will build a better functioning monetary union.