Quantifying and Correcting Eurozone Imbalances - Fighting the Debt Snowball

Claus Vistesen (2010) - Quantifying and Correcting Eurozone Imbalances - Fighting the Debt Snowball, Working Paper 01-10

This paper quantifies and discusses the concept of current account imbalances in the Eurozone. Using panel data estimations, the analysis shows how the external positions of the Eurozone economies can be modelled as a function of divergences in unit labour costs. Specifically, the results indicate that the formation of EMU has exacerbated the extent to which even relatively small divergences in unit labour costs may materialize in large current account imbalances. These results are framed in the context of the idea of a debt snowball effect and why the idea of an internal devaluation as a tool to correct external imbalances is inconsistent with the current setup of the Eurozone.