Addressing the Core-Periphery Imbalances in Europe: Resource Misallocation and Expansionary Fiscal Policies

This paper illustrates the nature of the core/periphery imbalances and anemic long-run growth in the Euro area. It discusses the problems associated with addressing them through expansionary fiscal policies in the core regions and greater domestic expenditure in unreformed peripheral areas. As competitiveness imbalances across regions have widened, both fiscal measures may backfire and a more nuanced policy mix is needed to reverse the unequal spatial distribution of high value-added activities and resource misallocation. Addressing the factors behind such imbalances is key for the survival of the Euro area because their size and persistence clash with the tendency towards an equalization of workers’ aspirations. This aspirations/resources mismatch is fuelling discontent and populist animosity against EU institutions and the core countries.