Europe’s Competitiveness Obsession

BRUSSELS – The President of the European Central Bank is said to show at each meeting of the European Council a graph depicting the evolution of relative wage costs across the eurozone’s 16 member countries. This chart shows increasing divergences over the last ten years, with the countries now facing difficulties (Greece, Portugal, and Spain) having lost competitiveness by around 20% relative to Germany. In other words, since 1999, wage costs have increased by about 20% less in Germany than in southern Europe.

The conclusion seems straightforward. The eurozone’s southern European members must reduce their wage costs to claw back the competitiveness that they have lost since adopting the common currency.

Concern about such divergences has also reached the task force headed by European Union President Herman Van Rompuy, which is supposed to devise fundamental reforms to the rules for economic policy coordination within the EU. A key proposal from the task force’s first meeting was to develop competitiveness indicators, and then force member countries to take “remedial action” should the EU find large divergences.

But this approach risks leading in the wrong direction. Competitiveness, which is usually measured in terms of unit labor costs, is a relative concept. One country’s gain is another’s loss. Restoring competitiveness in some member countries (Spain, Greece) would require others (Germany in the first instance) to accept deterioration in theirs.