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Journal of Economic Integration 2017 June;32(2) :324-357.
Revisiting the Factors behind European External Imbalances

Carlos A. Carrasco Adrian Hernandez-del-Valle 

Universidad de Monterrey (UDEM), San Pedro Garza Garcia, Mexico
Instituto Politécnico Nacional (SEPI-ESE-IPN), Mexico City, Mexico
Corresponding Author: Carlos A. Carrasco ,Tel: (00521) 2481604574, Email:
Copyright ©2017 Journal of Economic Integration
In this paper, we develop four hypotheses for the origins of European imbalances in the context of the European economic integration process. To test the validity of our hypotheses for Germany and Spain, we implement an Autoregressive Distributed Lag bounds testing approach. According to our results, in the German case, economic and financial integration and non-price competitiveness have played a key role in the evolution of the external balance, whilst for Spain, the external balance is related to catching-up. In addition, there is no evidence of a long-run relationship between public finance and external imbalances. We derive important policy implications. On the one hand, deficit countries should ensure that the capital inflows from abroad are allocated to industries with high-added value. On the other hand, surplus countries require the implementation of an expansive economic policy, to lessen the burden of deficit countries when trying to address external imbalances.

JEL Classification
F15: Economic Integration
F32: Current Account Adjustment; Short Term Capital Movements
F36: Financial Aspects of Economic Integration
Keywords: European External Imbalances | Current Account | Economic Integration | Catching-up | Competitiveness
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