KEY DRIVERS OF THE EURO AREA IMBALANCES.

Economic imbalances in euro area are a cause for serious concern. The key question is how the periphery countries will adjust. Today's debt crisis in the PIIGS countries is competitiveness and growth crisis and not merely a debt crisis. This article reviews key drivers of the euro area imbalances. A great proportion of the imbalances are due to structural lack of competitiveness, not price competitiveness. Currently, individual countries within the eurozone are seriously afflicted by both internal and external imbalances. The stylized facts and the empirical evidence suggest that both the fiscal fragility of the south, and the north-south divide of external imbalances, contribute to the ongoing eurozone crisis. We show that structural imbalances, like the ones that generate global financial crisis, might have been the underlying triggers of the euro area crisis. We find that current emphasis on fiscal austerity risks is counterproductive and stress the importance of adequate adjustment between surplus and deficit countries in the eurozone. Unless there is a change in industrial policies of periphery countries, which will require a change in the macroeconomic policies the underlying situation will not change. [ABSTRACT FROM AUTHOR]