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On Friday 9 April at 12.45 hrs. Katharina Weddige-Haaf will defend her PhD thesis Real and Financial Asymmetries in the Euro Area online.

The proper functioning of a currency union presupposes a sufficient degree of similarity of the participating economies or alternative mechanism to make up for a possible lack of similarity. The most recent economic and financial crisis, the European debt crisis and, lately, the covid-19 pandemic have revealed the vulnerabilities of the Euro Area (EA) in this respect. To successfully accommodate the various shocks, it is crucial to understand how real and financial markets interact and what the differences between euro area economies are. In her PhD thesis, Katharina Weddige-Haaf contributes to this understanding.
 

• Firstly, she used country-specific business and financial cycles to study their similarity between countries, and examined how much real and financial markets influence each other at the country and euro area levels.Domestic cycles appear to be influenced not only by each other, but the state of the EA economy and financial markets also influence domestic cycles. Therefore, different transmission channels impact on the domestic economy.
   
• Secondly, Weddige-Haaf studied how symmetric shocks to the Gross Domestic Product (GDP), the exchange rate and the interest rate influence euro area countries’ trade balances and their competitiveness.
  Within the EA, one country’s deficit has to be matched by a surplus in some other country (ies). If there is a shock to the economy which has the same initial impact on all EA countries, how do the trade balances respond? For trade between EA countries, unless nothing changes, there need to be some shifts in trade balances in both ways (deficit and surplus). But for the trade with non-EA countries, do the trade balances all react the same way?
  Weddige-Haaf’s analysis shows that the trade balances of countries are affected differently by the symmetric shocks and that the response is not related to the initial position of a countries trade balance. The income shocks are important drivers of trade balances. Changes in the exchange rate and monetary policy (interest rate changes) affect trade balances only temporarily.
   
• Thirdly, the PhD student studied if migration and the redistribution of taxes has promoted income convergence in Germany. Germany can be seen as a monetary union with fiscal redistribution. The example of Germany shows that convergence of incomes within a currency union will be a lengthy process even in the presence of migration and fiscal transfer schemes. This finding suggests that income differences in the euro area are likely to exist between countries of the EA in the longer run.

Asymmetries in euro area real and financial markets continue to exist and there are spillover effects between them. Differences in economic structures and institutions between countries result in asymmetric responses of their trade balances and competitiveness to symmetric shocks, Weddige-Haaf concludes. Understanding the link between real and financial markets is therefore crucial for EA policy making.

Katharina Weddige-Haaf is a PhD student at the Utrecht ľ¹Ï¸£ÀûÓ°ÊÓ School of Economics (U.S.E.).