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Trade imbalances within the Euro Area: two regions, two demand regimes

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  • Giovanni Covi

    (Bank of England
    University of Verona)

Abstract

Greater trade integration, convergence in economic performance and a high level of employment among member states: this was why the Euro Area was created. In this respect, the paper analyses the sources of trade imbalances within the Euro Area, focusing on the direct trade relationship—intra-EA trade—between surplus and deficit countries. The econometric evidence based on a VAR/SVAR methodology suggests that asymmetric wage shocks determine asymmetric gains from intra-EA trade, resulting from opposing growth strategies. In addition, the empirical evidence shows that the Euro Area is divided into two economic regions representing different demand regimes: a northern region, which is profit-led and a southern region, which is wage-led. The paper suggests that wage coordination is an essential macroeconomic tool but is insufficient to achieve trade and economic integration given the current state of divergence. Thus, a trade-based transfer mechanism is proposed to restore convergence in the Euro Area.

Suggested Citation

  • Giovanni Covi, 2021. "Trade imbalances within the Euro Area: two regions, two demand regimes," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(1), pages 181-221, February.
    • Handle: RePEc:kap:empiri:v:48:y:2021:i:1:d:10.1007_s10663-020-09477-3
    DOI: 10.1007/s10663-020-09477-3
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    1. Moritz Pfeifer & Gunther Schnabl, 2024. "Monetary Policy, Divergence, and the Euro," CESifo Working Paper Series 11442, CESifo.

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    More about this item

    Keywords

    Wage share; Euro Area; Trade imbalances; Demand regime; SVAR;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • F15 - International Economics - - Trade - - - Economic Integration
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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