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The effects of competitiveness on trade balance: The case of Southern Europe

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  • Bajo Rubio, Oscar
  • Berke, Burcu
  • Esteve García, Vicente

Abstract

According to the conventional wisdom, "peripheral" Southern European countries members of the euro area (Greece, Italy, Portugal, and Spain) suffer from a problem of competitiveness. Since devaluation is not possible because they are part of the euro, the adjustment should come through decreasing wages and prices in these countries, which, by improving the trade balance, should lead to recover the previous levels of employment and growth. In this paper, the authors estimate trade balance equations for the Southern European countries, both for total trade and for the trade performed with the European Union; and taking three alternative measures of the real exchange rate, i.e., based on consumption price indices, export prices and unit labour costs, respectively. Their main conclusion is that demand seems to be more relevant than relative prices when explaining the evolution of the trade balance.

Suggested Citation

  • Bajo Rubio, Oscar & Berke, Burcu & Esteve García, Vicente, 2016. "The effects of competitiveness on trade balance: The case of Southern Europe," Economics Discussion Papers 2016-30, Kiel Institute for the World Economy (IfW Kiel).
  • Handle: RePEc:zbw:ifwedp:201630
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    Cited by:

    1. Bajo-Rubio, Oscar & Berke, Burcu & McMillan, David G., 2020. "Exchange rate volatility in the eurozone," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 14, pages 1-23.
    2. Villanueva, Paloma & Cárdenas, Luis & Uxó, Jorge & Álvarez, Ignacio, 2020. "The role of internal devaluation in correcting external deficits: The case of Spain," Structural Change and Economic Dynamics, Elsevier, vol. 54(C), pages 282-296.
    3. Esposito, Piero & Messori, Marcello, 2019. "Competitive or recession gains? On the recent macroeconomic rebalances in the EMU," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 147-167.
    4. Álvarez López, M.ª Elisa & Vega Crespo, Josefa, 2017. "La fortaleza competitiva de la economía española/The Competitive Strength of the Spanish Economy," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 35, pages 7-34, Enero.
    5. Javier Bilbao‐Ubillos & Ana‐Isabel Fernández‐Sainz, 2022. "The results of internal devaluation policy as a crisis exit strategy: The case of Spain," Global Policy, London School of Economics and Political Science, vol. 13(5), pages 767-781, November.

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    More about this item

    Keywords

    trade balance; real exchange rate; competitiveness;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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