Diverging Tendencies of Competiveness

  • Sylvester C . W . Eijffinger
  • Published 2006

Abstract

Executive Summary In its Annual Report on the Euro Area 2006 the European Commission recently stated that "... a major characteristic of persistent growth differences within the euro area is that price and cost competitiveness have tended to adjust too slowly in some Member States. While fluctuations in intra-euro-area competitiveness are to be expected in the short term, the persistent deterioration of competitiveness in some slow-growing Member States suggests a failure to adjust to economic shocks." Calculated on the basis of unit labour costs, some euro-zone countries (e.g. Germany) have over the past few years gained in competitiveness measured against other countries. Moderate wage agreements below the productivity increase have been the main reason for this development. On the other side, some countries (e.g. Italy) have not been able to pursue similar wage moderation and have subsequently lost competitiveness, eventually finding themselves in difficult economic circumstances. Taking into account that in Economic and Monetary Union (EMU) differences in competitiveness can no longer be reacted to by adjusting nominal exchange rates, does this development bear any dangers for EMU? First, we will discuss the concepts of relative Unit Labor Cost (ULC) and the Real Effective Exchange Rate (REER) as indicators for measuring international competitiveness. Then, we give some preliminary emprical results for three euro-area countries with weak competiveness (Italy, the Netherlands and Greece) and three countries with strong competiveness (Germany, Austria and France). The main conclusion is that differences in growth and competitiveness between the euro-area countries are currently present, mostly due to differences in ULC and wage moderation policies. Each euro-area country finds their REER influenced by different variables, of which ULC of their own country and the average ULC of the other euro-area countries are always significant for estimating REER. By analyzing the factors influencing REER, future policies can be set up to decrease differences in price and cost competitiveness. These future policies should be focused in the short run on wage moderation being the most effective instrument. In the long run, however, policymakers in all euro-area countries should enforce structural reforms in labor markets to stimulate economic growth in the euro zone and to decrease differences in competitiveness further.

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Cite this paper

@inproceedings{Eijffinger2006DivergingTO, title={Diverging Tendencies of Competiveness}, author={Sylvester C . W . Eijffinger}, year={2006} }