Problem Detected and Resolved? Macroeconomic Imbalances in the EU

It is not enough just to identify macroeconomic imbalances. As the EU’s economic governance demonstrates, monitoring alone is insufficient. The member states must implement thorough reforms to create stable conditions for business.

In the aftermath of the 2007–09 crisis, the European Union created numerous new economic management instruments. Alongside fiscal management under the Stability and Growth Pact, in 2012 – for the first time – greater attention was turned to the macroeconomic imbalances that were important precursors of crisis, and exacerbated its negative effects. In particular in the euro countries, which are unable to compensate imbalances by modifying their exchange rates, imbalances had consequences for the entire Economic and Monetary Union. The loss of competitiveness drove a number of member states to the brink of collapse.

Macroeconomic imbalances in the EU: Fewer countries affected

Number of EU member states

The establishment of the Excessive Imbalance Procedure was therefore undoubtedly a step in the right direction. Its 14 standardised indicators help to detect the existence of these problems in the first place and to put them on the national and European agendas. A glance at the history shows that although the number of countries with excessive imbalances and/or macroeconomic adjustment programmes has remained largely constant (seven member states in 2016), many economies have succeeded in reducing their imbalances. In 2012 only 11 of 27 member states had no imbalances, in 2016 the figure is 14 out of 28, according to the European Commission. Of course naming the problem is not enough, and the road to resolution will have to involve ambitious structural reforms and macroeconomic adjustments in the member states.

Enthusiasm for Reforms has Fallen  

The six countries with excessive imbalances (Bulgaria, Croatia, Cyprus, France, Italy, and Portugal) are all struggling with high levels of debt in the public sector, of businesses, and/or private households, which they are compelled to address through responsible budget policies and the reduction of bad debts. Experience shows, however, that these processes require time. Additionally, the situation in Europe has stabilised after a moderate recovery and the pressure on the capital markets in these countries has receded. Altogether, therefore, enthusiasm for reforms in the EU has fallen.