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

This note illustrates the problems associated with addressing the core-periphery imbalances and anemic long-run growth through expansionary fiscal policies. As competitiveness imbalances among regions in the Eurozone have grown wide, both an expansion of fiscal expenditures in the core regions and greater domestic expenditures in unreformed peripheral areas may backfire. A more nuanced policy mix would in fact be needed to reverse the unequal spatial distribution of high value-added activities. Addressing competitive imbalances is key for the survival of the Eurozone as the size and persistence of the competitiveness imbalances across regions in the Eurozone clash with the tendency towards an equalization of workers’ aspirations, thereby feeding discontent and populist animosity against the EU institutions and the core countries.