Social Models under Economic and Monetary Union

Marzinotto, Benedicta (2015) Social Models under Economic and Monetary Union. [Conference Proceedings] (Submitted)

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Abstract

This paper explains the build-up and the reversal of macroeconomic imbalances in the euro area from a social-model point of view. Imbalances between the core and the periphery have been attributed either to fundamental differences in competitiveness or to the fact that capital was flowing into low-income countries where returns were highest. The former hypothesis is unable to account for the decoupling of export performance and standard cost competitiveness indicators and can hardly fit the Irish case. The latter is weak on push factors or, when focused on credit demand, unable to explain why countries with similar per capita income levels have different external positions. Others argue that EMU is forcing under the same straightjacket countries with different growth models. We consider specifically differences in social rather than growth models, those pertaining to the distribution of income, and how these interact with financial liberalization. The argument is that, while the supply of credit was extensive and available for all, the demand for credit was stronger in unequal countries where the share of the population that was credit-constrained prior to financial liberalization was higher than in relatively equal countries and where both financial openness and credit market regulation had been until then much more stringent. When the crisis hit, deleveraging through demand compression concerned specifically these groups, leading to current account deficit reversals. On the other hand, it did not necessarily affect equal countries where EMU was not associated with a massive relaxation of collateral constraints as in the periphery.

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