ABSTRACT
This chapter focuses on a major unsolved problem of European integration: the issue of external imbalances within the EU but also with countries outside the EU that are closely connected with it. The problem of external imbalances has affected many emerging economies (such as recently those of Argentina and Turkey) and has seriously interrupted their growth processes and thrown them back into turmoil. This chapter argues that, in a regime of liberalized capital movements, unsustainable current account imbalances are going to be persistent features reflecting processes that lead to real exchange rate misalignments. However, real exchange rate misalignments are one side of the coin, and the development of export capacities of sufficient size and quality is the other. Divergence in the development of the export capacities of the tradeable sector are bound to occur in any group of interdependent economies. This chapter discusses the specific features that might accentuate these problems in the European economy, and in those closely connected to it, and thus pose an existential problem to European integration if they are not counteracted by a serious reform of the policy-making and institutional structures of the EU.
