Current account imbalances and the Euro Area. Controversies and policy lessons

The crucial role of current account imbalances (CAI) is widely acknowledged in the consensus narrative of the European crisis that followed the Great Recession. On the basis of this interpretation, CAI play a prominent role in the EU Macroeconomic Imbalances Procedure (MIP), which broadens the EU economic governance framework to include the surveillance of unsustainable macroeconomic trends. Although the widening of the CAI in the Euro Area before the crisis is a matter of fact, and the consensus narrative contains elements of truth, alternative views have been put forward on three main issues: (i) the relevance of CAI, (ii) their causes and connection with the crisis, and (iii) their policy implications. The aim of this paper is to examine these controversial points about the causes, meaning and consequences of CAI, and discuss the alternative policy prescriptions that emerge.