Eurozone Macroeconomic Framework: Reducing Internal and External Imbalances

This article reviews internal and external balance policy issues in the Eurozone. The Swan diagram is used as a framework for assessing the policy actions needed to simultaneously restore both internal and external balance in selected Eurozone countries. A critical assessment is provided of using unit labour costs as an indicator of external competitiveness. It is argued that current macroeconomic policy settings are contributing to declining incomes, rising unemployment, high public debt and deflation, while failing to correct intra-Eurozone balance of payments disequilibria. A new macroeconomic policy plan is outlined for restoring economic growth and reducing external imbalances without raising public debt.