Macroeconomic imbalances within the EU

“Macroeconomic Imbalance Procedure”

Author: Sonta Rana
Pages: 18
Language: English
Publication date: 01/06/2015
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How are macroeconomic imbalances connected with the recent debt crisis?
This paper investigates if there are macroeconomic imbalances in the EMU or not. Especially concerning the recent debt crisis in many European countries, it is important to analyze the driving factors of these imbalances and the connection between imbalances and the increasing government debts. In order to prevent crisis such as the euro crisis, the EU implemented a mechanism to identify imbalanced developments. We need to identify which indicators are chosen by the EU to measure an imbalance and which of them shows a divergent development.
The most important imbalance according to the EU ́s “Scoreboard for the surveillance of macroeconomic imbalances” is the development of the current account balance of some European countries. The aggregated current account balance of the EU fluctuates around zero but one can observe that the single countries have various developments. In general, Northern European countries have current account surpluses while countries which are located more in the South of Europe are facing current account deficits. How do these CA imbalances affect other macroeconomic indicators and how are they related to the recent debt crises in Europe?
Besides the definition of the CA as exports of goods and services minus imports of goods and services, the CA balance can also be seen as the difference between gross domestic savings and gross domestic investments. Under this assumption, the imbalances represent massive capital flows moved from the North to the South of the EMU. Capital flows have increased enormously in recent years due to the innovations in the information- and communication technology. Therefore, the presence of current account imbalances and the investigation of their driving factors is one of the most important points in the global economy.
In the first part, the aim of this paper is to present the theoretical framework which helps to understand the relationships between the current account balances and other developments in an economy. Based on this analysis, the paper will assess in the second part whether the “Macroeconomic Imbalance Procedure” of the EU is a good instrument to eliminate the imbalances. What are the Indicators and how do they measure an imbalance? If there is an imbalance, according to these indicators, how accurate will the procedure of the EU deal with specific situations and how good is the instrument in general? Although the imbalance procedure is related to the whole EU, in this paper we will focus on the EMU since the debt crisis mainly affects the monetary union countries.
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The author has successfully completed the studies of Master of Science in International Economics as well as the Master of Science in Marketing and Distribution Management.

Every study was at least graded with "good".

*Must not be copied but taken as an example and scientific approach.

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