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Competitiveness and external imbalances within the euro area

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  • A team of the Working Group on Econometric Modelling of the European System of Central Banks

Abstract

The onset of the financial crisis in 2008 has highlighted the problems of diverging external imbalances within Economic and Monetary Union (EMU) and the role of persistent losses in competitiveness. This paper starts by investigating some of the competitiveness factors which contributed to external imbalances in euro area countries. The evidence suggests significant heterogeneity across countries in both price/cost and non-price competitiveness in the euro area and that there is no one factor, but rather a range of potential factors explaining diverging external imbalances. In particular, while non-price competitiveness effects contributed largely to the trade surplus in some countries, for some southern European countries the trade balance was also driven by price factors. The second part of the paper studies the implications of competitiveness adjustment by means of quantitative tools. Using four different multi-country macro models, improvements in both price/cost aspects (namely wage reduction, productivity improvements or fiscal devaluation) and non-price competitiveness factors (quality improvements) were shown – under certain conditions – to improve external imbalances. The analysis suggests differences in countries’ composition of trade could lead to heterogeneity in the potential gains from improvements in competitiveness. JEL Classification: F30, E60, E65, E44

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Bibliographic Info

Paper provided by European Central Bank in its series Occasional Paper Series with number 139.

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Date of creation: Dec 2012
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Handle: RePEc:ecb:ecbops:20120139

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Keywords: competitiveness; euro area; macro models; open economy; simulations; Trade;

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  1. Schmitz, Martin & De Clercq, Maarten & Fidora, Michael & Lauro, Bernadette & Pinheiro, Cristina, 2012. "Revisiting the effective exchange rates of the euro," Occasional Paper Series 134, European Central Bank.
  2. Lukas Vogel, 2011. "Structural reforms and external rebalancing in the euro area: a model-based analysis," European Economy - Economic Papers 443, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
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  6. Forni, L. & Gerali, A. & Pisani, M., 2010. "Macroeconomic Effects Of Greater Competition In The Service Sector: The Case Of Italy," Macroeconomic Dynamics, Cambridge University Press, vol. 14(05), pages 677-708, November.
  7. Vanda Almeida & Gabriela Castro & Ricardo Félix, 2010. "Improving competition in the non-tradable goods and labour markets: the Portuguese case," Portuguese Economic Journal, Springer, vol. 9(3), pages 163-193, December.
  8. Brzoza-Brzezina, Michał & Jacquinot, Pascal & Kolasa, Marcin, 2010. "Can we prevent boom-bust cycles during euro area accession?," Working Paper Series 1280, European Central Bank.
  9. Ratto, Marco & Roeger, Werner & Veld, Jan in 't, 2009. "QUEST III: An estimated open-economy DSGE model of the euro area with fiscal and monetary policy," Economic Modelling, Elsevier, vol. 26(1), pages 222-233, January.
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  12. Bricongne, J-C. & Fontagné, L. & Gaulier, G. & Taglioni, D. & Vicard, V., 2009. "Firms and the global crisis: French exports in the turmoil," Working papers 265, Banque de France.
  13. Ruud de Mooij & Michael Keen, 2012. ""Fiscal Devaluation" and Fiscal Consolidation: The VAT in Troubled Times," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 443-485 National Bureau of Economic Research, Inc.
  14. Emanuele Breda & Rita Cappariello & Roberta Zizza, 2007. "Vertical Specialisation in Europe: Evidence from the Import Content of Exports," Rivista di Politica Economica, SIPI Spa, vol. 97(3), pages 189, May-June.
  15. Lipińska, Anna & von Thadden, Leopold, 2009. "Monetary and fiscal policy aspects of indirect tax changes in a monetary union," Working Paper Series 1097, European Central Bank.
  16. Holm-Hadulla, Fédéric & Kamath, Kishore & Lamo, Ana & Pérez, Javier J. & Schuknecht, Ludger, 2010. "Public wages in the euro area - towards securing stability and competitiveness," Occasional Paper Series 112, European Central Bank.
  17. Angela Cheptea & Guillaume Gaulier & Soledad Zignago, 2005. "World Trade Competitiveness: A Disaggregated View by Shift-Share Analysis," Working Papers 2005-23, CEPII research center.
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Cited by:
  1. Spahn, Peter, 2013. "Subprime and euro crisis: Should we blame the economists?," FZID Discussion Papers 83-2013, University of Hohenheim, Center for Research on Innovation and Services (FZID).
  2. Gabrisch, Hubert & Staehr, Karsten, 2014. "The euro plus pact: cost competitiveness and external capital flows in the EU countries," Working Paper Series 1650, European Central Bank.
  3. Paulo Soares Esteves & António Rua, 2013. "Is there a role for domestic demand pressure on export performance?," Working Papers w201303, Banco de Portugal, Economics and Research Department.
  4. Peter Spahn, 2013. "Competitiveness, Adjustment and Macroeconomic Risk Management in the Eurozone," ROME Working Papers 201316, ROME Network.
  5. Teresa Sastre & Francesca Viani, 2014. "Countries’ safety and competitiveness, and the estimation of current account misalignments," Banco de Espa�a Working Papers 1401, Banco de Espa�a.

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