Buried in this month’s “Annual Report on the Euro Area 2009″ from the European Commission is some absorbing material on competitiveness in the eurozone. Some countries, above all Germany, Europe’s export champion, have consistently outshone others in terms of business competitiveness since the euro’s launch in 1999. The result has been the accumulation of large current account deficits in countries such as Cyprus, Greece, Portugal and Spain - but also in Ireland, Malta, Slovakia and Slovenia.
As the Commission says, in impeccably understated language: “The build-up of large external liabilities has increased exposure to financial shocks… In the current downturn, financial markets have become more responsive to the net external financial asset position for the euro area countries. Even if to a large extent the net external position is related to the private sector, the public sector can be affected by private sector debt in the form of potential bail-outs and other fiscal implications.”
Put simply, the Commission is warning that the gap between Germany and other strong performers - such as Austria, Finland and the Netherlands - and the group of laggards poses a bigger risk to the eurozone’s stability than it did before the financial crisis. If you are one of the laggards in competitiveness and your financial sector is in trouble, then the financial markets will start taking a close look at how sustainable your public finances are. And because you share a common currency with 15 other countries, your problem is unavoidably their problem, too.
There is some evidence that the laggards are cutting their current account deficits. Spain’s, for example, is projected to fall to 5 per cent of gross domestic product next year from 9 per cent this year. But in general the countries that need to improve competitiveness most urgently are also those with the worst rigidities in labour and product markets. As a result, unit labour costs in the laggard countries have risen by 2.5 per cent or more every year since 1999, whereas Germany’s unit labour costs have stayed more or less unchanged.
This problem clearly needs addressing before the strains on European monetary union (EMU) become intolerable. What is to be done? The Commission’s report is masterfully vague, saying: “Competitiveness developments warrant broader surveillance… Effective functioning of EMU calls for an early detection of these external imbalances in order to prompt an adequate and timely policy response.”
Germany’s response, I reckon, would be more blunt. The Germans would tell the laggards: “Put your houses in order, like we did after being hit with the gigantic cost of our country’s reunification in 1990. Regain competitiveness. If it means your citizens have to put up with stagnant living standards for a number of years, so be it. Eurozone membership is not a free ride.”
The only thing is, I’m not sure this is what the laggards want to hear.

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I have been the FT's Brussels bureau chief since September 2007 and was previously the bureau chief in Frankfurt and Rome. In this blog you'll find my thoughts on everything from the European Union's foreign and economic policies to the fortunes of its political leaders - as well as the more light-hearted aspects of life in Europe.
