It is plainly apparent that now is the time to make adjustments to the severe macroeconomic imbalances created by the sudden stop in capital flows to the countries in the southern periphery of the eurozone. But crucial questions arise about how to correct the imbalances, how to share the burden of the adjustment and what is the role of the European institutions, foremost the European Central Bank (ECB), in this process. Against this background, this paper first identifies the macroeconomic imbalances, focusing on intra-euro area current account disequilibria and the role of competitiveness. It then assesses the role of the common monetary policy and the monetary transmission mechanisms in the build-up of the imbalances. Finally, it introduces the possible role of the ECB and the ESRB in the process of rebalancing and as potential sources of inconsistency.
Daniel Gros is Director of CEPS. He originally prepared this paper at the request of the Economic and Monetary Committee of the European Parliament.