Abstract
This article analyses developments in the international cost competitiveness of six southern euro area economies using newly developed Effective Exchange Rate indices. It argues that traditional aggregate ULC-based indicators suffer from a number of limitations. In particular, they are affected by shifts towards more labour intensive industries and are also susceptible to global trends in the ULCs of particular sectors. In this light, this article computes sectorial ULC-deflated Effective Exchange Rate indices for a selection of southern euro area economies, which apart from providing more detail at a sectorial level, are more robust to structural changes. The newly developed indicators show a considerable degree of heterogeneity in the sectorial competitiveness developments of some economies. Moreover the newly developed overall economy sectorial ULC-deflated indices tend to diverge considerably from the traditional aggregate ULC-based indicators for small open economies that have been undergoing fast structural changes. In particular, the use of traditional ULC-based indicators tends to over-state the loss in competitiveness for economies that have either a fast-growing, or a larger than average services sector. DOI: 10.5901/mjss.2016.v7n6p17
Highlights
Both the global financial crisis of 2008 and more recently the sovereign debt crisis of 2012 have led to a renewed interest in the study of the determinants of international competitiveness
Assessing international competitiveness is a key analytical and policy challenge, especially for economies within the euro area, which in the lack of independent monetary and exchange rate policies, must rely on internal devaluations to correct for unsustainable trade deficits
Aggregate ULC measures are very sensitive to changes in the sectorial composition of output and might by driven by changes in the economy’s structure as well as by differences in the economies’ sectorial composition
Summary
Both the global financial crisis of 2008 and more recently the sovereign debt crisis of 2012 have led to a renewed interest in the study of the determinants of international competitiveness This issue is seen as even more crucial to economies in the euro area, which in the absence of independent exchange rate and monetary policies are forced to regain competitiveness through, most often painful, internal devaluation processes. For this reason, international institutions, most notably the European Commission and the ECB, have highlighted the need of structural reforms aimed at correcting the external imbalances of the Eurozone member countries which have been accumulating external deficits for a number of years. Developments in ULCs can be affected by shifts towards more labour intensive industries and are susceptible to global trends in the ULCs of particular sectors
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