Intra-European imbalances, adjustment, and growth in the eurozone

This paper considers the increase in the Euro intra-area imbalances since the late 1990s and their role in the current European debt crisis. By focusing on the case study of Italy and Germany, we argue that both macroeconomic (the functioning of the Euro area ) and microeconomic (internalization of production) factors contributed to the creation of such imbalances. When sovereign risk and currency risk emerged in the periphery, coupled with austerity as a response to these risks, both factors made the Euro crisis worse. The present zero-sum-game approach is very risky for the stability of the Euro area. Policy coordination of some kind is needed. This requires agreeing on well-identified economic policy priorities, taking full account of the different positions of the members in terms of growth, external imbalances and competitiveness. New policy priorities are thus required in the Euro zone that put more emphasis on cooperative (positive-sum) games in convergence and competitiveness.