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The Economists’ Voice

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Monetary Integration, Fiscal Divergence and Current Account Imbalances in Europe

Gunther Schnabl
Published Online: 2018-11-30 | DOI: https://doi.org/10.1515/ev-2018-0026


The paper scrutinizes the role of diverging fiscal policy stances for diverging current account positions in Europe with a focus on the European Monetary Union (EMU). In a heterogeneous monetary union fiscal policy has the task to absorb asymmetric shocks to ensure the efficacy of the one-size monetary policy. It is argued that since the early years of the European Monetary Union divergent fiscal policies combined with monetary expansion constituted a major determinant of current account divergence within the euro area, which finally led into the European debt and financial crisis. Panel regressions reveal a significant impact of fiscal policies on current account positions, which to a large extent are independent from the exchange rate regime and turn out to be contingent on monetary and fiscal policy mix. Based on the findings economic policy recommendations are presented.

Keywords: current account imbalances; Europe; European financial and debt crisis; European Monetary Union; exchange rate adjustment; fiscal policy; macroeconomic policy coordination

JEL Classification: H62; F32; F33; F42


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About the article

Published Online: 2018-11-30

Citation Information: The Economists’ Voice, 20180026, ISSN (Online) 1553-3832, DOI: https://doi.org/10.1515/ev-2018-0026.

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