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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. Michał Brzoza-Brzezina & Pascal Jacquinot & Marcin Kolasa, 2014. "Can We Prevent Boom-Bust Cycles During Euro Area Accession?," Open Economies Review, Springer, Springer, vol. 25(1), pages 35-69, February.
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Citations

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Cited by:
  1. Paulo Soares Esteves & António Rua, 2013. "Is there a role for domestic demand pressure on export performance?," Working Papers, Banco de Portugal, Economics and Research Department w201303, Banco de Portugal, Economics and Research Department.
  2. Spahn, Peter, 2013. "Subprime and euro crisis: Should we blame the economists?," FZID Discussion Papers, University of Hohenheim, Center for Research on Innovation and Services (FZID) 83-2013, University of Hohenheim, Center for Research on Innovation and Services (FZID).
  3. Hubert Gabrisch & Karsten Staehr, 2014. "The Euro Plus Pact: Cost Competitiveness and External Capital Flows in the EU Countries," WWWforEurope Policy Paper series, WWWforEurope 15, WWWforEurope.
  4. Peter Spahn, 2013. "Competitiveness, Adjustment and Macroeconomic Risk Management in the Eurozone," ROME Working Papers, ROME Network 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, Banco de Espa�a 1401, Banco de Espa�a.
  6. Gabrisch, Hubert & Staehr, Karsten, 2014. "The euro plus pact: cost competitiveness and external capital flows in the EU countries," Working Paper Series, European Central Bank 1650, European Central Bank.

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