In this paper, we discuss the economic adjustment achieved so far since
the beginning of the euro crisis and take stock of the funding of the
balance of payments imbalances through the euro area central banks.
􀂄 We find that the domestic demand and cost adjustment needed to
restore external balance has begun, but is far from concluded. In the
meantime, the funding of continuing balance of payments imbalances by
the euro area central banks is leading to a widening of the imbalances
within the Target2 inter-bank payment system.
􀂄 It seems that exports (and by implication imports) of Greece, Ireland,
Portugal and Spain are not sufficiently price sensitive to achieve external
balance through relative price changes. From this follows that
adjustment has to come mainly from changes in domestic demand.
Exports of Italy and Germany, on the other hand, seem to be more price
sensitive, making external adjustment there easier.
􀂄 Based on a simple illustrative exercise we find that GDP will probably
have to drop by considerable further amounts in Greece, Portugal and
Spain to achieve external balance. Hence, with the achievement of
sustainable balance of payments positions still not in sight for most of
the problem countries, EMU seems to remain at risk for the foreseeable
future

Table of Contents
Key Economic Forecasts .................................... Page 2
Economic adjustment in Euroland: where do we
stand? ................................................................. Page 3
Central Bank Watch ............................................ Page 9
Global Data Monitor ......................................... Page 13
Charts of the Week .......................................... Page 14
Global Week Ahead .......................................... Page 15
Financial Forecasts .......................................... Page 17
Main Deutsche Bank
Global Economics Publications ....................... Page 18