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The Challenge of Economic Rebalancing in Europe

The Challenge of Economic Rebalancing in Europe

Perspectives for CESEE Countries

Edited by Ewald Nowotny, Doris Ritzberger-Grünwald and Helene Schuberth

In the long aftermath of the acute global financial crisis of 2008/09, “rebalancing” the economy with new sources of growth and productivity remains a persistent necessity. This book addresses the resulting trade-offs and challenges. These needs, and the corresponding policy challenges, are especially prevalent in Europe, in particular Central, Eastern and South-Eastern Europe. On this issue, this book contributes lessons learned from earlier balance sheet recessions. It also addresses the often overlooked link between macroeconomic imbalances and economic inequality. Further contributions focus on the interaction between monetary policy and financial stability, adding a regional perspective to these important issues.

Chapter 1: European investment to support CESEE and euro area countries

Ewald Nowotny

Subjects: economics and finance, financial economics and regulation, international economics, money and banking


What do we mean by ‘rebalancing’, the pivotal term of this book? Obviously, the term signifies a readjustment from a state of imbalance – an economic imbalance in our case. Typically, economists distinguish between external and internal imbalances. By external imbalances, they usually mean disequilibria (mostly deficits) in the current account which, if protracted, might lead to an unsustainable net international investment position. The underlying reason for a current account deficit can differ from case to case: it can be trade-induced via export weaknesses, indicating a lack of competitiveness; it could also reflect strong import demand due to unsustainably high growth. This leads us directly to internal imbalances, such as accumulated private and public debt, asset price bubbles, unemployment or excessive inflation (or deflation). One could also add sectoral or distributional imbalances contributing to uneven growth. Internal and external imbalances are often interlinked, but their interrelation is not always clear-cut. This chapter is structured as follows: section 1.1 assesses the challenges to the convergence process in Europe revealed by the crisis; section 1.2 elaborates on the investment gap and its solution; section 1.3 takes a historical perspective on rebalancing issues; before the final session summarizes and concludes with a general remark on policy-making.