Blog Post

Chart of the Week – Competitiveness adjustment in euro-area periphery

A lot of the discussions surrounding competitiveness and rebalancing have focused on divergent unit labour costs. But in reality, competiveness is not simply a question of prices and it could be improved through non-price factors as well. The latter typically takes a long time. Progress in price competitiveness is shown by the figure below. Unit labour cost […]

By: Date: April 18, 2012 Topic: Macroeconomic policy

A lot of the discussions surrounding competitiveness and rebalancing have focused on divergent unit labour costs. But in reality, competiveness is not simply a question of prices and it could be improved through non-price factors as well. The latter typically takes a long time. Progress in price competitiveness is shown by the figure below.

Unit labour cost (ULC) based real effective exchange rate (REER) index and its main components (2008Q1=100), 2000Q1-2011Q4

Click here FILE  to download a .gif version of the chart above.

Note: The ULC-REER, which is calculated against 36 trading partners, is available at the Eurostat website till 2011Q3 and therefore the 2011Q4 values were calculated by the author using domestic ULC from the Eurostat, the nominal effective exchange rates from a recent paper of mine, with the assumption that foreign ULC has not changed from 2011Q3 to 2011Q4. Greek data is available in a non-seasonally adjusted form from the Eurostat and therefore I adjusted the data using X12. Productivity is measured as real GDP per hours worked.

The good news is that the ULC-REER started to adjust significantly in Ireland and Spain and moderately in Greece. Adjustment in Portugal is quite limited so far (top-left panel). Another good news is that productivity improved significantly since 2008 in Ireland and Spain; Portugal also outperforms Germany in this respect (top-middle panel). A little hope is also provided by Germany by not depreciating further its ULC-REER since 2008.

But there are many bad news. The productivity increase in Ireland and Spain was the result of a greater fall in employment than the fall in output, with harmful social consequences. Employment is also collapsing in Greece and the trajectory is extremely worrying (bottom-left panel). Despite the tough labour market conditions nominal wages have hardly adjusted, though some downward adjustment can be observed in Ireland and Greece (bottom-middle panel). Downward wage rigidity also characterised another country, which is sometimes regarded as having achieved a successful internal devaluation of the real exchange rate: while public sector wages declined significantly in Latvia, private sector wages hardly changed. Since 2008 hourly wage inflation was just slightly faster in Germany than in the other countries, which did not bring much relief so far to the ailing countries in the periphery. Shortening work-time, which played an important role in Germany in supporting employment, helped somewhat Ireland, but not the other adjusting countries. In Spain working hours were even lengthened since 2008 (bottom-right panel).

A possible compositional effect further darkens the picture, as highlighted by Paul Krugman. The reason is that if eg low-productivity construction workers are laid off massively while high-productivity manufacturing workers keep their jobs, then average productivity goes up, even if there is no productivity gain in any individual sector of the economy. This leads to an overestimation of the fall in ULC.

Yet there is another compositional effect as well, which works exactly the opposite way. If eg low-wage construction workers are laid off massively while higher-wage earners keep their job, then the average nominal wage of the economy increases, even if there is no wage increase in any individual sector of the economy. This leads to an underestimation of the fall in ULC. I shall soon publish a working paper assessing these compositional issues in detail.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event More on this topic
 

Past Event

Past Event

Fiscal policy and rules after the pandemic

What are the possibilities for shaping the new fiscal policy?

Speakers: Zsolt Darvas, Maria Demertzis, Michel Heijdra and Katja Lautar Topic: Macroeconomic policy Date: November 24, 2021
Read article
 

Blog Post

European governance

Including home-ownership costs in the inflation indicator is not just a technical issue

The European Central Bank is right to propose inclusion of owner-occupied housing services in the inflation indicator. But the ECB’s preferred method would involve an asset price in the consumer inflation indicator.

By: Zsolt Darvas and Catarina Martins Topic: European governance, Macroeconomic policy Date: November 18, 2021
Read article More by this author
 

Blog Post

Fiscal arithmetic and risk of sovereign insolvency

The record-high debt levels in advanced economies increase the risk of sovereign insolvency. Governments should start fiscal consolidation soon in an environment of low nominal and real interest rates and post-COVID growth.

By: Marek Dabrowski Topic: Global economy and trade, Macroeconomic policy Date: November 18, 2021
Read article More by this author
 

Opinion

European governance

Growth and inflation after the pandemic in the EU

Countries hit comparatively hard during the financial crisis, helped also by domestic and European policies, are bouncing back from the pandemic faster than their peers.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: November 18, 2021
Read article Download PDF More by this author
 

Parliamentary Testimony

European governanceFrench Senate

European Union countries’ National Recovery and Resilience Plans: A cross-country comparison

Testimony before the Economic Affairs Committee of the French Senate.

By: Simone Tagliapietra Topic: European governance, French Senate, Macroeconomic policy Date: November 12, 2021
Read article Download PDF
 

Policy Contribution

European governance

Next Generation EU borrowing: a first assessment

The Next Generation EU programme is radically changing the way the EU finances itself and interacts with financial markets. This paper assesses the first design decisions made by the European Commission and the issuances that have taken place so far. It also outlines the potential risks and opportunities linked to this upgrading of the EU borrowing.

By: Rebecca Christie, Grégory Claeys and Pauline Weil Topic: Banking and capital markets, European governance, Macroeconomic policy Date: November 10, 2021
Read article Download PDF More by this author
 

Parliamentary Testimony

European governanceEuropean Parliament

The New Euro Area Inflation Indicator and Target: The Right Reset?

Testimony to the Monetary Dialogue Preparatory Meeting of the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Zsolt Darvas Topic: European governance, European Parliament, Macroeconomic policy Date: November 9, 2021
Read about event More on this topic
 

Past Event

Past Event

Phasing out COVID-19 emergency support programmes: effects on productivity and financial stability

How can European countries phase out the COVID-19 support measures without having a negative impact on productivity and financial stability?

Speakers: Eric Bartelsman, Maria Demertzis, Peter Grasmann and Laurie Mayers Topic: Macroeconomic policy Date: November 9, 2021
Read article
 

External Publication

European governanceEuropean Parliament

The new euro area inflation indicator and target: the right reset?

In-depth analysis on the European Central Bank's revised inflation target prepared for the European Parliament's Committee on Economic and Monetary Affairs (ECON).

By: Zsolt Darvas and Catarina Martins Topic: European governance, European Parliament, Macroeconomic policy Date: November 4, 2021
Read about event More on this topic
 

Past Event

Past Event

European monetary policy: lessons from the past two decades

This event will feature the presentation of “Monetary Policy in Times of Crisis – A Tale of Two Decades of the European Central Bank."

Speakers: Petra Geraats, Wolfgang Lemke, Francesco Papadia and Massimo Rostagno Topic: Macroeconomic policy Date: November 4, 2021
Read article Download PDF
 

Policy Contribution

European governance

COVID-19 financial aid and productivity: has support been well spent?

While support schemes during the pandemic were not targeted at protecting ‘good’ firms, financial support mostly went to those with the capacity to survive and succeed. Labour schemes have been effective in protecting employment.

By: Carlo Altomonte, Maria Demertzis, Lionel Fontagné and Steffen Müller Topic: European governance, Macroeconomic policy Date: November 4, 2021
Read article Download PDF More on this topic
 

Working Paper

Does money growth tell us anything about inflation?

Attention should be paid to a possible sequence of negative events: if inflation would start to be volatile and money growth remains high, efforts to control inflation could be undermined.

By: Leonardo Cadamuro and Francesco Papadia Topic: Macroeconomic policy Date: November 4, 2021
Load more posts