Peterson Institute publications
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
RSS News Feed Search

Working Paper 13-1

The Importance of Trade and Capital Imbalances in the European Debt Crisis

by Andrew Hughes Hallett, George Mason University
and Juan Carlos Martinez Oliva, Peterson Institute for International Economics

January 2013

View full document [pdf]


The current debate on the European crisis has highlighted the role of fiscal imbalances in explaining the turmoil that has dominated Europe in the past few years. This paper adopts a different point of view by suggesting that intra-European payments imbalances are crucial for the survival of the Economic and Monetary Union (EMU). Indeed, payment imbalances between the North and South have contributed to the accumulation of a large stock of foreign debt, while flows of foreign capital ceased to finance productive investments that might have contributed to debt repayments. The dynamic interplay between current account imbalances and the accumulation of foreign debt reveals that, once the system is driven into disequilibrium by a real exchange rate misalignment, the longer a payments imbalance persists and the harder the eventual adjustment will be. Capital reversals, by shifting portfolio balances, then lead the system toward instability, sovereign default, and the collapse of the exchange rate regime.


RELATED LINKS

Policy Brief 15-23: Toward a European Migration and Mobility Union December 2015

Policy Brief 15-11: Hungary under Orbán: Can Central Planning Revive Its Economy? July 2015

Paper: Capital Markets Union: A Long-Term Vision April 25, 2015

PIIE Briefing 14-5: Rebuilding Europe's Common Future: Combining Growth and Reform in the Euro Area December 2014

Testimony: Economic Crisis: The Global Impact of a Greek Default June 25, 2015

Testimony: Banking Union in Nine Questions September 30, 2014

Book: Managing the Euro Area Debt Crisis June 2014

Book: Inside the Euro Crisis: An Eyewitness Account June 2014

Book: Responding to Financial Crisis: Lessons from Asia Then, the United States and Europe Now October 2013

Policy Brief 13-17: A Realistic Bridge Towards European Banking Union June 2013

Op-ed: Five Myths about the Euro Crisis September 7, 2012

Testimony: Challenges of Europe's Fourfold Union August 1, 2012

Policy Brief 12-18: The Coming Resolution of the European Crisis: An Update June 2012

Book: Transatlantic Economic Challenges in an Era of Growing Multipolarity July 2012

Book: Resolving the European Debt Crisis March 2012

Policy Brief 12-4: The European Crisis Deepens January 2012