Coping with Imbalances in the Euro Area: Policy Alternatives Addressing Divergences and Disparities between Member Countries

Abstract

In this paper we outline alternative policy recommendations addressing the problems of differential inflation, divergence in competitiveness and associated current account imbalances within the Euro area. The major purpose of these alternative policy proposals is to generate sustainably high demand and output growth in the Euro area as a whole, providing high levels of non-inflationary employment, as well as preventing ‘export-led mercantilist’ and ‘debt-led consumption boom’ types of development, both within the Euro area and with respect to the role of the Euro area in the world economy. We provide a basic framework in order to systematically address the related issues making use of Thirlwall’s (1979; 2002) model of a ‘balance-of-payments-constrained growth rate’ (BPCGR). Based on this framework, we outline the required stance for alternative economic policies and then we discuss the implications for alternative monetary, wage/incomes and fiscal policies in the Euro area as a whole, as well as the consequences for structural and regional policies in the Euro area periphery, in particular.