Book Description

The book shows that the overcoming of the negative imbalances in the current accounts of the large majority of peripheral Member States in the euro area is mainly due to a recession-driven decrease in import, a monetary wage compression, and below average rates of inflation. This re-equilibrating process thus leads to short-term adjustments, in the sense that it is unable to structurally fill the competitive gaps accumulated inside the euro area during the first decade of its life (1999-2007), owing to the inefficient allocation of the financial flows coming from the European central countries and invested in the European peripheral countries. Contrary to the predictions of the standard macroeconomic models based on the “catching up” mechanism, these financial flows did not adequately foster the productivity of lagged Member States in the euro area. Our proposal is to replace the “invisible hand” of the market with the “visible hand” of a European policy project. We argue that an effective policy initiative would have to combine a programme of European public and private investments with “contractual arrangements” aimed at implementing crucial national reforms. This strategy might provide a short term positive demand shock as well as the long term strengthening of the structural competitiveness of the peripheral Member States without involving direct financial transfers but allowing an intergovernmental co-operation and a trust-building process under the control of the European institutions. Marcello Messori is Professor of Economics at the Department of Political Science, LUISS Guido Carli (Rome) and Director of the LUISS School of European Political Economy (SEP).