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The Euro Plus Pact: Cost Competitiveness and External Capital Flows in the EU Countries

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  • Hubert Gabrisch
  • Karsten Staehr

Abstract

The Euro Plus Pact was approved by 23 EU countries in March 2011 and came into force shortly afterwards. The Pact stipulates a range of quantitative targets meant to strengthen cost competitiveness with the aim of preventing the accumulation of external financial imbalances. This paper uses Granger causality tests and vector autoregressive models to assess the short-term linkages between changes in the relative unit labour cost and changes in the current account balance. The sample consists of annual data for 27 EU countries for the period 1995-2012. The main finding is that changes in the current account balance precedes changes in relative unit labour costs, while there is no discernable effect in the opposite direction. The divergence in unit labour costs between the countries in Northern Europe and the countries in Southern and Eastern Europe may thus partly be the result of capital flows from the core of Europe to the periphery prior to the global financial crisis. The results also suggest that the measures in the Euro Plus Pact to restrain the growth of unit labour costs may not affect the current account balance in the short term.

Suggested Citation

  • Hubert Gabrisch & Karsten Staehr, 2014. "The Euro Plus Pact: Cost Competitiveness and External Capital Flows in the EU Countries," WWWforEurope Policy Paper series 15, WWWforEurope.
  • Handle: RePEc:feu:wfeppr:y:2014:m:7:d:0:i:15
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    Cited by:

    1. Claudius Gräbner & Philipp Heimberger & Jakob Kapeller & Bernhard Schütz, 2017. "Is Europe Disintegrating? Macroeconomic Divergence, Structural Polarisation, Trade and Fragility," wiiw Working Papers 136, The Vienna Institute for International Economic Studies, wiiw.
    2. Ludek Kouba & Michal Madr & Danuse Nerudova & Petr Rozmahel, 2016. "Policy Autonomy, Coordination or Harmonization in the Persistently Heterogeneous European Union?," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 1, pages 53-71, March.
    3. repec:kap:iecepo:v:15:y:2018:i:2:d:10.1007_s10368-017-0402-6 is not listed on IDEAS
    4. Hubert Gabrisch, 2015. "Net Capital Flows To And The Real Exchange Rate Of Western Balkan Countries," Economic Annals, Faculty of Economics, University of Belgrade, vol. 60(205), pages 31-52, April – J.
    5. Gheorghe HURDUZEU & Maria-Isadora LAZAR, 2015. "An Assessment of Economic Stability under the New European Economic Governance," Management Dynamics in the Knowledge Economy Journal, College of Management, National University of Political Studies and Public Administration, vol. 3(2), pages 301-315, June.
    6. repec:psl:pslqrr:2017:23 is not listed on IDEAS
    7. Servaas Storm & C.W.M. Naastepad, "undated". "Crisis and Recovery in the German Economy: The Real Lessons," Working Papers Series 10, Institute for New Economic Thinking.
    8. Storm, Servaas & Naastepad, C.W.M., 2015. "Crisis and recovery in the German economy: The real lessons," Structural Change and Economic Dynamics, Elsevier, vol. 32(C), pages 11-24.
    9. repec:wfo:wstudy:58136 is not listed on IDEAS
    10. Jan Priewe, 2018. "A time bomb for the Euro? Understanding Germany's current account surplus," IMK Studies 59-2018, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    11. Raphael Fischer & Gunther Schnabl, 2018. "Regional heterogeneity, the rise of public debt and monetary policy in post-bubble Japan: lessons for the EMU," International Economics and Economic Policy, Springer, vol. 15(2), pages 405-428, April.
    12. repec:mes:ijpoec:v:45:y:2016:i:1:p:46-71 is not listed on IDEAS
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    15. repec:nov:artigo:v:25:y:2015:i:spe:p:749-775 is not listed on IDEAS
    16. Pablo Duarte & Gunther Schnabl, 2015. "Macroeconomic Policy Making, Exchange Rate Adjustment and Current Account Imbalances in Emerging Markets," Review of Development Economics, Wiley Blackwell, vol. 19(3), pages 531-544, August.
    17. Stockhammer, Engelbert & Constantine, Collin & Reissl, Severin, 2016. "Neoliberalism, trade imbalances and economic policy in the Eurozone crisis," Economics Discussion Papers 2016-3, School of Economics, Kingston University London.

    More about this item

    Keywords

    European integration; policy coordination; unit labour costs; current account im-balances; economic crisis;

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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