Greece, Portugal, Spain become more competitive
The crisis forced the troubled eurozone economies to fire workers and cut salaries and this is boosting their competitiveness, a study shows
Much of the competitiveness gap that partly caused the eurozone debt crisis is disappearing, as unit labour costs fall rapidly in the periphery countries, a study by the business research think tank The Conference Board shows.
If you look at the entire European Union, the countries that have best performed in the period starting in the second quarter of 2011 have been Greece, Portugal and Spain. They have made the best downward adjustments in their labour costs, Bert Colijn, labour market economist with The Conference Board Europe and one of the authors of the study, told Emerging Markets.
The countries that have not felt the crisis that hard, the countries that therefore have not had to make any radical adjustment, countries like France and Germany, are the ones that have seen labour costs rising the most, Coljin added.
Between the second quarter of 2011 and the second quarter of 2012 unit labour costs measured as nominal labour compensation relative to real output fell by 9.2% in Greece, by 5.9% in Portugal and by 2.1% in Spain.
Wage cuts and large employment cuts that still continue in these countries have led to a fall in total labour compensation by 14.9% in Greece, 8.4% in Portugal and 3.5% in Spain within the same period.
You see that even though output is declining, the people who are still in the companies are becoming more productive, said Coljin. These are adjustments in companies that are going bankrupt.
The crisis is causing the least productive companies to go bankrupt and the least productive employees to be fired, he said.
Italy was an outlier, as the crisis only began for it late in 2011, when investors started to worry about the lack of attention to the countrys structural problems.
However, Mario Montis technocratic government that took power in November 2011 put in place significant reforms to modernize the Italian economy and regain the trust of investors, the report showed.
It also showed that, since the second quarter of 2011, labour compensation in Italy has increased only moderately but the slowdown of the pace of the increase was not yet enough to offset the big rises that took place since the crisis started.
UK LOSES COMPETITIVENESS
In Germany, the increase of unit labour costs was the quickest since the start of the single currency area in 1999, partly because of pay rises in the manufacturing sector, according to the study.
The higher wages could give a boost to consumption in Germany and the eurozone but in the long run rising labour costs in Germany could be an increasing source of concern as the level of German unit labour costs is already among the highest in the eurozone, it said.
These worries are more immediate for France, where labour cost competitiveness is the subject of discussion in numerous French economic debates.
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In the UK, a country outside the eurozone and where the government has congratulated itself for not having joined the single currency, labour competitiveness has been lost.
Since the second quarter of 2011, unit labour costs in sterling increased by 4.7%, which except for Estonia which underwent a big downward adjustment during the 2008-2009 recession is higher than in any country in the eurozone, the report showed.
When converted from pounds to euros, the increase in unit labour costs is an incredible 14.2% because the pound has appreciated since the second quarter of 2011, it also showed.
CRISIS OF CONFIDENCE
But, Coljin said, the fact that labour costs are falling in the periphery countries does not mean they are out of the woods.
The problem is that you can adjust your unit labour costs all you want but if investment doesnt return to your country, youre basically ending up in a downward spiral where consumption will continue to go down and, if theres no foreign investment coming, its very difficult to keep your economy afloat, he said.
The problem in Europe right now is that this is a crisis of confidence. Its very difficult to get confidence back in these economies right now and that is partly the issue why investment is declining at a very rapid pace in these countries.
Another problem is that credit constraints are still big in Europe; until bank lending comes back at an across-the-board scale, it will be difficult, he said.
The signs are encouraging. German IFO and pan-European consumer and business confidence data have improved after ECB President Mario Draghis promise to do all he can to defend the eurozone and in the wake of announcements from policy makers that the single currency area is marching towards banking and maybe fiscal union.
All this has had a delayed effect on confidence and right now you see some of that coming back, Coljin said.The earlier more clarity about the future of the euro and in what sort of shape or form that will be comes, the better it is, and that will certainly help these troubled economies.