Patterns of Convergence (Divergence) in the Euro Area: Profitability Versus Cost and Price Indicators

Abstract

We document that profitability—profit margins—has diverged in Euro-area countries since the introduction of the euro. Changes in profitability only partially overlap with changes in unit labour costs and producer prices, which are the indicators more commonly used in the literature to assess the competitiveness of euro-area member countries. We provide suggestive evidence that changes in profitability are correlated with changes in relative export performance, whereas the correlations between export and price and export and unit labour costs are unclear. We check the robustness of this correlation on a panel of 10 countries that adopted the euro between 1999 and 2001, and two-digit manufacturing sectors covering the period from 1999 to 2015, and conclude that profitability in the tradable sector is a useful indicator to assess the competiveness of euro-area countries. This is consistent with the recent international trade literature, according to which firms that export more are also more efficient or produce better products, as well as charging higher mark-ups.