Competitiveness gaps could hurt euro -EU exec

By Jan Strupczewski

BRUSSELS, Jan 26 (BestGrowthStock) – A new European Commission
report has expressed concern about gaps in competitiveness that
could undermine confidence in the euro zone and point to
tensions related to wage levels and capital flows in the
16-member club.

Among other things, the report suggests the real effective
exchange rate for Greece, Spain and Portugal is overvalued by
more than 10 percent — an indication of how much wages in these
countries would have to fall, or productivity rise, to make them
competitive again, given that they are locked into the euro.

Large and persistent differences in competitiveness across
the zone are a serious concern and can undermine confidence in
the single currency, the Commission said.

“Competitiveness divergences within the euro area may hamper
the functioning of the Economic and Monetary Union, because of
large trade and financial spillovers across Member States,” said
the note from the European Union’s executive arm, prepared for
the last euro zone finance ministers’ meeting on Jan 18.

“In particular, the persistence of large cross-country
differences jeopardises confidence in the euro and
threatens the cohesiveness of the euro area,” said the note,
obtained by Reuters.

It sums up a 172 page Commission report on competitiveness
in the 16 countries using the single currency, which was also
seen by Reuters.

The differences in competitiveness are reflected for example
in current account deficits or surpluses in the eurozone.

The Commission estimates Greece had a current account gap
of 8.8 percent of GDP last year, Spain 5.4 and Portugal 10.2
percent. Cyprus had a current account gap of 11.6 percent while
Germany had a surplus of 4 percent, Luxembourg 9.4 percent, the
Netherlands 3.1 and Finland 1.1 percent.

The note said that the accumulation of large current account
deficits could not be sustained forever and that they entailed a
build-up of external and private sector debt.

“If they remain unaddressed, the eventual correction can be
abrupt and highly disruptive not only for the countries
concerned but also for the rest of the euro area,” it said.

“The combination of competitiveness losses and the excessive
accumulation of public debt in some Member States are worrying
in that context,” the note said.

TENSIONS

Because of rigidities in labour and product markets,
regaining lost competitiveness will be long and painful, but the
longer the adjustment is postponed the higher the ultimate cost
will be, the Commission said.

The Commission said that in the 10 years before the
financial crisis, the competitiveness of, for example, Germany
and Finland against other euro zone members steadily rose, while
competitiveness of Ireland, Greece, Spain or Portugal fell.

“The divergence trend observed in the early years of euro
reflects a worrying build-up of a range of domestic imbalances
in some Member States,” the Commission said.

While the report suggests the real effective exchange rate
for Greece, Spain and Portugal is overvalued, it says Germany’s
was 5.1 to 3.1 percent undervalued last year, indicating the
slack companies have or the scope for wage increases.

It said that most indicators of price and cost
competitiveness pointed to a further divergence in
competitiveness in the many euro zone countries during the
financial crisis and in the early stages of the recovery.

The only clear signs of rebalancing come from Ireland gaining
in competitiveness in 2008 and 2009.

“A smooth adjustment of intra-euro area competitiveness
divergence and macroeconomic rebalancing is key for the recovery
and, more generally, for the economic resilience and a smooth
functioning of EMU in the long term,” the Commission note said.

“It is therefore essential that Member States put in place
an ambitious and comprehensive policy response geared at
speeding up and improving intra-area adjustment mechanisms.”

It said tackling the differences would have to be tailored
to individual countries but that such efforts should be
coordinated within the euro zone to make the work easier.

It said fiscal policy should make sure not to hinder
adjustments in competitiveness by preventing the necessary
relocation of labour and that countries with large current
account gaps should swiftly move to consolidate public finances.

“The successful adjustment of intra-euro area
competitiveness divergence and macroeconomic imbalances is of
vital importance for the long-term functioning of EMU,” the
Commission said.

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(Reporting by Jan Strupczewski, editing by Patrick Graham)

Competitiveness gaps could hurt euro -EU exec