Full text: Repair the roof when the sun is shining (171)

Europe's current economic situation 
c) Did nominal imbalances decrease in the euro area?
The evolution of nominal imbalances within the euro area, can be performed 
using a "fundamental equilibrium exchange rate" methodology. The idea is to 
compute the adjustment of the general price level in every euro area economy 
that would be compatible with both an internal equilibrium (the full utilization 
of production factors, both labour and capital) and an external equilibrium (a 
current account deficit small enough to limit foreign debt accumulation-or 
conversely a surplus that does not lead to an excessive accumulation of foreign 
assets). The computation also depends on the sensitivity of imports and exports 
to price movements of domestic and foreign exporters.7 Figure 6 shows the 
nominal adjustments that we estimate were necessary in both 2007 and 2016, 
computed relatively to the EA averages . 
Figure 6. Nominal adjustments needed with respect to EA average 
40 · 
• 2007 • 2016 
-60 -
Source: iAGS calculations. 
7. See iAGS 2015 for a complete description of the methodology. The price elasticities have been
updated for the four largest euro area countries.
8. We do not consider here the external imbalances of the EA as a whole relatively to the rest of
the world. Yet, today, the euro is undervalued, given the large trade surplus of the area. A real
appreciation is therefore needed to go back to equilibrium, and that can be obtained either
through a nominal appreciation or through price increases within the euro area. The latter
solution would be preferable, in order to avoid a deflationary spiral, and in that case price
increases should be much more important in Germany than in Southern countries.

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