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External Imbalance

In: Social Issues

Submitted By pritiwari03
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3) What is the external imbalance refer to, why is it an issue in EZ/ And how it is related to the saving, investment relationship as discussed in the open economy chapters of the textbook?
External imbalances refers to a situation where some countries have current account surpluses compared to other countries with current account deficits. External Imbalances are reflected in trade imbalances(which are driven by labor wage differentials, competitiveness differences and differences in absorption), current account imbalances and external debt. Since the formulation of the EUROZONE, there has been a difference of sorts, some countries for example Germany and France have benefitted and saw persistence gains in price and cost competitiveness while other countries like Greece and Portugal have showed tremendous losses. At the same time, some countries have experienced a surplus in their current account balances whereas some countries have accumulated very large deficits, which resulted in the depreciation of net foreign asset positions. If this prevails, this can act as a worry since persistent losses in competitiveness and mounting external imbalances not only increase the economic and financial vulnerability of individual countries but can act as a deterrence for the functioning of the euro area as a whole. The euro area has come under severe pressure which was triggered by the adjustments in the fiscal accounts of Greece, the crisis which had further spread to countries like Portugal and Ireland and further to Spain and Italy, which has become a threat to the very existence of the euro zone formation.
The Euro zone sovereign debt crisis, triggered by the 2008-2009 global financial crisis, exposed external imbalances in member countries that had accrued gradually following the advent of the euro in 1999. The growing current-account deficits in the Euro zone…...

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