This allocation spurred internal demand and, owing to inflexible labour markets, wages increased more than productivity. This, in turn, reduced the competitiveness of the countries in question. As a consequence, imports increased, exports dwindled and the current account deficit grew further. Although these imbalances have domestic roots, the associated problems are not confined to the national level.
Given spill-over effects in the closely integrated euro-area financial markets, they are also a problem for other member states and for the monetary union as a whole. The debt crisis in the first half of this year was a case in point. Its external effects mean the problem of divergencies and imbalances in EMU has to be solved. What are the policy options? 3.