Competitiveness Disparities Behind the Economic Crisis in the Euro Area

Olavi Rantala

No 23, ETLA Reports from The Research Institute of the Finnish Economy

Abstract: Abstract The euro area economic crisis is largely a result of the competitiveness disparity between Germany and the rest of the euro area. The wage moderation in Germany has considerably improved its competitiveness in relation to the rest of the euro area. Wage policy has been deflationary in Germany in the 2000s in the sense that real wage growth has fallen below labour productivity growth. In the rest of the euro area wage policy has been inflationary since real wage growth has exceeded labour productivity growth. The input-output price model implies that due to the lower wage inflation the unit cost of production in industry has grown much less in Germany than in the rest of the euro area. Restoring competitiveness necessitates a clear wage inflation halt in the rest of the euro area in the coming years.

Keywords: Euro crisis; Competitiveness (search for similar items in EconPapers)
JEL-codes: C67 E64 F16 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2014-04-01
New Economics Papers: this item is included in nep-cse, nep-eec, nep-ger and nep-mac
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