15 January 2016

ECB's Cœuré: Rebalancing in the euro area: are we nearly there yet?

In his speech, ECB's Cœuré notes that sustainable rebalancing is key to ensuring growth and stability in the euro area as well as to completing EU monetary union, because the political will needed to achieve this project will not exist unless economic divergences are first ironed out.

Speech by Benoît Cœuré, Member of the Executive Board of the ECB, Danish Economic Society, Kolding

Sustainable rebalancing requires that adjustment is stable, symmetrical and structural.

Since the crisis we have seen considerable improvements, especially in the countries that entered the crisis with large current account deficits. Deficits in the (former) programme countries have adjusted dramatically. Costs adjustments have also taken place in surplus countries.

But the rebalancing process has not yet reached its steady state.

In several stressed countries adjustment was achieved through lower potential growth. Employment is still more than 10% below 2008 levels. Achieving both external rebalancing and high employment requires a better reallocation of available resources and higher productivity. The Capital Markets Union and completing the single market for services are two ways forward. Seeing rebalancing as all about cutting costs – which is what policymakers often think of as “competitiveness” – is misguided.

Surplus countries also have a contribution to make to rebalancing the euro area. Demand-side policies in these countries would support euro area price stability, but would have a very limited long-term impact. A combination of higher public investment and structural reforms to create incentives for increased private investment would address both external imbalances and the domestic challenges of weak investment and low potential growth.

The full potential of using the Macroeconomic Imbalance Procedure has so far not been realised and its corrective arm should be used forcefully. Euro area countries still have a way to go to make rebalancing sustainable. Doing so is not only essential for their own stability and growth. Ultimately, it is economic divergence that fuels political divergence, which is what makes the euro area so fragile.

Full speech

© ECB - European Central Bank