The Competitiveness Dynamics in the Eurozone

Abstract

The goal of this paper is to analyze the long term dynamics of the competitiveness in the individual Eurozone countries and to estimate how their competitiveness is affected by the dynamics of both external (i.e. the current account) and internal (the fiscal stance and the credit dynamics) positions. It is today increasingly recognized that the diverging competitiveness between the Eurozone members is at the root of the current crisis. But the competitiveness dynamics and how it is impacted by the crucial fiscal and financial variables during the common currency existence is seldom analyzed and compared, especially as far as the different countries are concerned. This paper aims to contribute to filling this gap. Figure 1 Real Effective Exchange Rates (REER's) for the Euro 1999:Q 1 = 100 a) REER's based on ULC: 1998:Q 1 - 2012:Q 2 120 100 80 1998 1999 2000 2001 2002 2003 2004 Germany Austria Luxembourg France Netherlands Belgium b) REER's based on CPI: 1998:Q 1 - 2012:Q 2 125 115 105 95 85 1998 1999 2000 2001 2002 2003 2004 Germany Austria Luxembourg France Netherlands Belgium However, these were usually explained by pointing out that the Germany entered the Eurozone with the overvalued exchange rate, hence the observed divergencies were actually equilibriating processes. This explanation (false, as it turned out) was sometimes supplemented by pointing out at the possibility (and desirability) of the Ballasa-Samuelson phenomenon to be expected in the economically less advanced Mediterranean counties, together with possible stati-stical biases as a consequence of the structural changes associated with the advancing globalization processes. (For the more detailed discussion, see Rusek, 2012.) Author : Susquehanna University, Selinsgrove.