Euro area imbalances: How much could an expansion in the North help the South?

We run simulations of current account rebalancing scenarios in the Euro Area and the European Union based on a closed multi-country input-output model. The spillover effects of domestic demand booms in the Northern European surplus countries are non-negligible, but not large. While they cannot on their own create a meaningful upswing in the former Southern European deficit countries, they could be an important element thereof. In particular, a Northern expansion can create the necessary policy space for a domestic demand-driven expansion in the European South by relaxing the balance of payments constraint. Then, a coordinated asymmetric expansion in the Euro Area could alleviate the unemployment crisis in the European South.