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Competitiveness and external imbalances within the euro area

Chiara Osbat, Alex Jochem, Selin Özyurt, Patry Tello, Zacharias Bragoudakis (), Brian Micallef, Dimitris Sideris, Niki Papadopoulou (), Viktors Ajevskis (), Judit Krekó, Guillaume Gaulier (), Alistair Dieppe (), Michal Brzoza-Brzezina, Stephane Dees (), Igor Vetlov, Pascal Jacquinot, Massimiliano Pisani (), Tohmas Karlsson, Sandra Gomes, Jean-Charles Bricongne () and Milan Vyskrabka

No 139, Occasional Paper Series from European Central Bank

Abstract: The onset of the financial crisis in 2008 has highlighted the problems of diverging external imbalances within Economic and Monetary Union (EMU) and the role of persistent losses in competitiveness. This paper starts by investigating some of the competitiveness factors which contributed to external imbalances in euro area countries. The evidence suggests significant heterogeneity across countries in both price/cost and non-price competitiveness in the euro area and that there is no one factor, but rather a range of potential factors explaining diverging external imbalances. In particular, while non-price competitiveness effects contributed largely to the trade surplus in some countries, for some southern European countries the trade balance was also driven by price factors. The second part of the paper studies the implications of competitiveness adjustment by means of quantitative tools. Using four different multi-country macro models, improvements in both price/cost aspects (namely wage reduction, productivity improvements or fiscal devaluation) and non-price competitiveness factors (quality improvements) were shown - under certain conditions - to improve external imbalances. The analysis suggests differences in countries' composition of trade could lead to heterogeneity in the potential gains from improvements in competitiveness. JEL Classification: F10, F41, F43, F47, O52

Keywords: competitiveness; euro area; macro models; open economy; simulations; trade (search for similar items in EconPapers)
Date: 2012-12
Note: 261931
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Handle: RePEc:ecb:ecbops:2012139