A1 - Guillaume Gaulier
A1 - Vincent Vicard
TI - Some Unpleasant Euro Arithmetic
IS - 2018-21
T3 - CEPII Policy Brief
KW - Current account imbalances
KW - Euro area
KW - Exchange rates misalignments
N2 - Current estimates of misalignments in real effective exchange rates show that euro area imbalances are still large: Germany exhibits a 20 percentage point undervaluation compared to the rest of the euro area (EA). Within a monetary union, rebalancing requires price adjustments through differentials in inflation rates. The rebalancing process therefore involves a 2 percentage point higher inflation in Germany than in the rest of the EA over a decade, or a 1 pp over two decades. It also requires above 2% inflation in surplus countries to meet the 2% ECB inflation target. At the current pace, rebalancing is a 20 year process and requires sustained very low inflation rates in the rest of the euro area.
ER -