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The Elephant in the Euro Room

  • Alex Patelis
Part of the Palgrave Macmillan Studies in Banking and Financial Institutions book series (SBFI)

Abstract

Over the medium term, the elephant in the euro area room is Germany’s record current account surplus, the direct result of the asymmetric policy response to the crisis. This reflects too weak domestic demand in Germany and results in low euro area inflation. No long-term equilibrium can be reached without that being significantly reduced. Correcting this incredibly large imbalance will be very difficult and creates future global vulnerabilities. There are only two ways: First, via real exchange rate appreciation — primarily higher inflation in Germany. This trend should be compounded by record divergence in labor markets between Germany and the euro area. Second, via losses in accumulated assets — those are now mostly outside the euro area periphery. Any future global recession will be robustly transmitted via Germany.

Keywords

Current Account Euro Area Real Exchange Rate Monetary Union Foreign Asset 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Alex Patelis 2015

Authors and Affiliations

  • Alex Patelis

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