Competitive or recession gains? On the recent macroeconomic rebalances in the EMU

This paper assesses the long-run sustainability of rebalancing in trade positions within the Eurozone by looking at the impact of prices and Unit Labor Costs (ULCs) for core and peripheral countries. We estimate import demand and export supply functions and we decompose Real Effective Exchange Rates to separate the dynamics of the ULC elements – wages and labor productivity – and of consumer prices from those of nominal exchange rates. The rebalances of peripheral countries mainly resulted from the effect of domestic demand and inflation on imports, the persistence of these rebalances from that of international demand and wages on exports. Productivity plays a major role only in core countries. It follows that European adjustments are fragile. © Elsevier Inc. All rights reserved