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Balance of payments adjustment mechanisms in the Euro area

Author

Listed:
  • Martina JIRÁNKOVÁ

    (Department of World Economy, University of Economics, Prague)

  • Pavel HNÁT

    (Department of World Economy, University of Economics, Prague)

Abstract

The article aims at analysing the current situation in the Euro area with respect to the balance of payments adjustment mechanism that should normally be at place. Internally, the Euro area membership represents a combination of the fixed exchange rate, capital mobility and no monetary policy autonomy; externally, the Euro area countries apply floating exchange rates with high capital mobility, and autonomous monetary policy. Member states thus cannot use the monetary instruments to prevent external influences; they can only use fiscal policies, which are limited by the Stability and Growth Pact and debt constraint. When external imbalance occurs (such as today), the economies of member states are exposed to the price and income adjustment processes as well as to their own fiscal and ECB policy impacts. This article shows that all these factors interfere and influence real effects of automatic adjustment mechanisms which in some cases cannot come forth at all. Factors within domestic economic policies that limit the restoration of external balance within the Euro area thus create an important outcome of this paper.

Suggested Citation

  • Martina JIRÁNKOVÁ & Pavel HNÁT, 2012. "Balance of payments adjustment mechanisms in the Euro area," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 3, pages 67-86, June.
    • Handle: RePEc:jes:journl:y:2012:v:3:p:67-86
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    File URL: http://ejes.uaic.ro/articles/EJES2012_0301_JIR.pdf
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    References listed on IDEAS

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    1. Olivier Blanchard, 2007. "Current Account Deficits in Rich Countries," IMF Staff Papers, Palgrave Macmillan, vol. 54(2), pages 191-219, June.
    2. Olivier Blanchard & Francesco Giavazzi, 2002. "Current Account Deficits in the Euro Area: The End of the Feldstein Horioka Puzzle?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 147-210.
    3. Olivier Blanchard, 2007. "Current Account Deficits in Rich Countries," IMF Staff Papers, Palgrave Macmillan, vol. 54(2), pages 191-219, June.
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