External imbalances in the EU: A REER-based explanation

The debt crisis of the eurozone revealed a structural problem of the single market rooted in the external imbalance problem of indebted member states. The assumption of this paper is that the current account imbalances within the eurozone are based on an intra-eurozone competitiveness disparity originated in the single currency and the heterogeneity of member state development. The mix of infi nite pegging and heterogeneity creates real effective exchange rate appreciation in the less competitive members, which further ruins their competitiveness in the EU.