Rebalancing Europe: Mission Half Accomplished, at Best

This article presents a simplified scheme of the euro crisis, suggesting that there are at least three areas of imbalances in the EMU: fiscal, current account and banking imbalances. The article analyses in which way these areas of imbalances are intertwined and, on aggregate, lead to lower growth across the currency union. By going through the fiscal, current account and banking imbalances in more detail, we find that the political focus of both structural adjustment and institutional reform has shifted from ‘fiscal union’ to ‘banking union’, while rebalancing of current accounts is well underway. Higher inflation, especially in core countries, would be helpful to soften deflation risks of rebalancing, in our view.