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ISRN Economics
Volume 2013 (2013), Article ID 787352, 17 pages
http://dx.doi.org/10.1155/2013/787352
Research Article

Efficiency of Demand Shocks in Order to Reduce Current Account Imbalances in the EMU

Université Paris Descartes, 12 Rue de L’école de Médecine, 75270 Paris Cedex 06, France

Received 16 August 2013; Accepted 9 September 2013

Academic Editors: J. M. Labeaga and E. Yeldan

Copyright © 2013 Séverine Menguy. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

With the current European sovereign public debt crisis and current account imbalances difficulties in the EMU, many papers now underline that the problem of the European construction is its lack of institutional framework and common economic governance necessary to make a monetary union viable. According to these papers, the solution would lie in a stronger economic cooperation, with the Northern European countries contributing to lighten the burden of the Southern debtor countries. In this context, our model shows that a symmetric positive demand shock in the EMU could only slightly reduce the external indebtedness of the Southern European countries but would efficiently reduce their public debt levels. To the contrary, an asymmetric positive demand shock in the creditor Northern European countries (e.g., an increase in German wages) could reduce the current account deficits of the Southern European countries, in particular for countries with the highest openness to trade. Nevertheless, it would worsen the indebtedness levels, and it would also increase the recessionary risks in these countries.