Addressing the core-periphery imbalances in Europe: Resource misallocation and expansionary fiscal policies

Abstract

This work illustrates the nature of the core/periphery imbalances and anaemic long-run growth in the Euro area and discusses the problems associated with addressing them through expansionary fiscal policies in the core regions and greater domestic expenditures in unreformed peripheral areas. As competitiveness imbalances across regions have widened, both fiscal measures may backfire, and a more nuanced policy mix is in fact 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 in fact fuelling discontent and populist animosity against the EU institutions and the core countries.