External Imbalances in the European Monetary Union: The Case for Keynesian Income Policy

In the current monetary regime, which has been practised since the breakdown of the BrettonWoods system in 1971, there is no explicit coordination rule for economic policies on an international scale. In particular, central banks are not committed to stabilising exchange rates of their currencies. Whenever imbalances occur in international trade and international movements of capital, these should be contained by adjustments of market exchange rates. Nonetheless, an increasing concern has evolved in recent years regarding the growth of external imbalances that have been disclosed in the current accounts. In several G20 summits proposals came on the agenda to limit current account imbalances in relation to GDP. The background to those attempts at implementing an international coordination rule was the experience that high and lasting deficits in the current account of a country may work as an accelerator in the event of a financial crisis.