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Competitiveness Disparities Behind the Economic Crisis in the Euro Area

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  • Rantala, Olavi

Abstract

The euro area economic crisis is largely a result of the competitiveness disparity between Germany and the rest of the euro area. The wage moderation in Germany has considerably improved its competitiveness in relation to the rest of the euro area. Wage policy has been deflationary in Germany in the 2000s in the sense that real wage growth has fallen below labour productivity growth. In the rest of the euro area wage policy has been inflationary since real wage growth has exceeded labour productivity growth. The input-output price model implies that due to the lower wage inflation the unit cost of production in industry has grown much less in Germany than in the rest of the euro area. Restoring competitiveness necessitates a clear wage inflation halt in the rest of the euro area in the coming years.

Suggested Citation

  • Rantala, Olavi, 2014. "Competitiveness Disparities Behind the Economic Crisis in the Euro Area," ETLA Reports 23, The Research Institute of the Finnish Economy.
    • Handle: RePEc:rif:report:23
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    File URL: http://www.etla.fi/wp-content/uploads/ETLA-Raportit-Reports-23.pdf
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    More about this item

    Keywords

    Euro crisis; Competitiveness;

    JEL classification:

    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • E64 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Incomes Policy; Price Policy
    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

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