Despite overall improvement, shifts in individual eurozone members’ competitiveness remain disparate. The chart above, compiled by Hermes Investment Management, shows the absolute competitiveness-shifts by country. With the escape route of currency devaluation closed, the deciding factor has been whether members undertake the internal cost-adjustment to boost competitiveness, thereby generating GDP and tax revenue.
On this basis, the biggest winners still include Germany, which is helpful given it accounts for a third of eurozone GDP. Germany saw its unemployment rate rise from 8% in 2001 to over 11% by 2005, but this reaped dividends and has since translated cost control into substantial current account improvement, offering stability to the zone. By contrast, other members have experienced a deterioration. Because of its adjustment, Germany has managed to cut its relative unit labour costs (RULC) by 8.5%, but, countries on the right-hand side of the chart saw theirs climb.
Up until 2010, Spain and Italy’s competitiveness deteriorated the quickest while Ireland and Greece had to suffer deflation to ‘improve’ their position. But, Spain and Italy’s deterioration is correcting, and their shortfall versus Germany reducing. This is shown by the reducing cluster in the chart, as Spain and Italy move back to the left. The up-to-2010 period is highlighted by the blue blobs to show how members’ relative positions have improved since austerity. The estimates to 2014 (in pink), thus suggest improvement during austerity. The UK has managed to outperform by virtue of its net 12% trade-weighted currency depreciation since 2000 – a route cut off to eurozone members. This raises hope that austerity is paying dividends and gives credence to the view the narrowing in bond spreads generated by Draghi’s “whatever it takes” pledge is being underpinned by tangible improvement.
However, as Hermes chief economist Neil Williams says: “It comes at significant economic and social cost, warning of more tensions to come. First, lower trade flows and the drain on resources mean that strains may be impacting the ‘core’ members. Germany’s competitiveness is still improving, but sustaining it may be difficult for as long as its eurozone peers (37% of Germany’s direct exports) sail close to recession. France’s triple-A ratings have been lost over, among other things, its failure to reverse a 7% competitiveness hit with the euro.”
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