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Understanding the macroeconomic imbalance procedure: Origin, rationale and aims

Written by Christian Scheinert,

Big Elephant balancing on a sphere with Ying yang symbol of harmony and balance. Alternative medicine theme.

© Kletr / Fotolia

Both the global financial crisis and the European sovereign debt crisis uncovered a high level of macroeconomic imbalances, which constituted major economic fault-lines, and led to the spread and acceleration of these crises. Imbalances had built up over years, sometimes decades, and correcting them proved to be a long and painful process. The main source of imbalance was the consequences of an unprecedented expansion in demand, fuelled by large credit inflows into the euro-area periphery. This created major problems when the EU, already bending under the financial crisis that originated in the USA, saw its own financial markets lose confidence. The financial flows from Europe’s economic core to the periphery reversed, leaving the periphery vulnerable, and creating repercussions throughout Europe and beyond.

In parallel to coping with the immediate problems, lawmakers took steps to avoid a re-occurrence of such events. The EU’s economic governance framework, which had proven inadequate, underwent a major overhaul, with the addition of a macroeconomic imbalance procedure (MIP) being the most important part. The aim of the MIP is to identify and correct imbalances as early as possible in order to avoid deeper problems at a later stage, thus supplementing the Stability and Growth Pact (SGP). A framework was created in which each individual Member State, especially those part of the euro area, is thoroughly screened for macroeconomic imbalances, and preventive as well as corrective action is taken whenever necessary.

Read the complete briefing on ‘Understanding the macroeconomic imbalance procedure: Origin, rationale and aims‘ in PDF.

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