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Competitiveness and external imbalances within the euro area

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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

Suggested Citation

  • A team of the Working Group on Econometric Modelling of the European System of Central Banks, 2012. "Competitiveness and external imbalances within the euro area," Occasional Paper Series 139, European Central Bank.
  • Handle: RePEc:ecb:ecbops:20120139
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    File URL: http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp139.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Angelini, E. & Dieppe, A. & Pierluigi, B., 2015. "Modelling internal devaluation experiences in Europe: Rational or learning agents?," Journal of Macroeconomics, Elsevier, pages 81-92.
    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 Esteves & António Rua, 2015. "Is there a role for domestic demand pressure on export performance?," Empirical Economics, Springer, pages 1173-1189.
    4. Karsten Staehr & Robert Vermeulen, 2016. "How competitiveness shocks affect macroeconomic performance across euro area countries," DNB Working Papers 515, Netherlands Central Bank, Research Department.
    5. Peter Spahn, 2013. "Competitiveness, Adjustment and Macroeconomic Risk Management in the Eurozone," ROME Working Papers 201316, ROME Network.
    6. Cardoso, Ana Rute & Guimaraes, Paulo & Portugal, Pedro, 2012. "Everything You Always Wanted to Know about Sex Discrimination," IZA Discussion Papers 7109, Institute for the Study of Labor (IZA).
    7. 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).
    8. Teresa Sastre & Francesca Viani, 2014. "Countries’ safety and competitiveness, and the estimation of current account misalignments," Working Papers 1401, Banco de España;Working Papers Homepage.
    9. Paulo Esteves & António Rua, 2015. "Is there a role for domestic demand pressure on export performance?," Empirical Economics, Springer, pages 1173-1189.

    More about this item

    Keywords

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

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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