Southern Europe competitiveness gap ‘rapidly declining’: Report

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Greece, Portugal and Spain are rapidly reversing the loss of wage competitiveness that was a significant cause of the eurozone crisis, new figures showed today (30 January). The report also looks at labour cost evolution in Germany, France and Britain.

The Conference Board, a business research organisation, said unit labour costs, which measure how much a worker earns per hour for the output produced, tumbled 9.2% in Greece between the second quarter of 2011 and the same period of 2012.

In Portugal and Spain, the falls were 5.9% and 2.1% respectively, making their exports more competitive and increasing their appeal as investment destinations.

Troubled economies on the eurozone periphery have also topped the productivity growth tables over the same period as weak companies have gone to the wall, the Conference Board said in a report.

Bert Colijn, an economist in Brussels with the research outfit and one of the authors of the study, said the findings gave the lie to the belief in some circles that debtor countries are dodging their commitment to painful reform and adjustment.

"The gap in competitiveness is rapidly declining, which is a very positive sign," he said in a telephone interview.

But drastically lowering labour costs by shedding jobs and reducing wages is ultimately unsustainable. The Conference Board, which has its headquarters in New York, said at some point the economies concerned would enter a downward spiral that would reduce their long-term growth potential and intensify political and social pressures.

So countries on the southern rim of the eurozone need to build on their renewed wage competitiveness by reviving output. That in turn calls for a resumption of capital spending, which has evaporated because of doubts over the future of the euro.

"These countries are waiting desperately for investment to return. The problem is that banks are pretty tight on credit and business confidence is low. That's why business investment has been declining by double digits in countries like Portugal, Spain and Greece," Colijn said.

Score card

Looking at individual countries, the report said:

  • Spain's manufacturing labour costs have decreased by 21% since the onset of the global crisis in 2008, and total unit labour costs by 12.6%.
  • Italy is showing the first signs of improvement, but since 2008 total unit labour costs in its manufacturing sector, which is currently shrinking sharply, have risen by more than any other euro member except Finland. "This means that the Italian manufacturing sector is not only showing large losses now, but that it is also getting into a progressively worse shape for the middle to long term," the report said.
  • Germany's unit labour costs are rising at the fastest rate since the euro was created in 1999. This could be a concern in the long run as German costs are already among the highest in the 17-country bloc.
  • In France, compensation in manufacturing was flat from 2008 to 2012. But as value-added declined by 8.6%, unit labour costs actually increased by 9.5%. Recent business tax cuts aim to reverse two-thirds of this increase, but most troubled euro nations have already made more progress, the Conference Board noted.
  • Away from the eurozone, Britain's unit labour costs have risen 4.7% in sterling terms since the second quarter of 2011, partly because a dearth of credit has prevented companies from investing in new machines to displace workers. Because of the appreciation of the pound, the increase is a whopping 14.2% when measured in euros. "It should be remembered that the United Kingdom's main trading partners are within the euro area, which demonstrates that having a separate currency can be both a blessing and a curse," the Conference Board said.

Labour cost differences across Europe can be huge, according to recent figures by the European statistical office Eurostat.

Hourly labour costs for 2011 range from €3.5 in Bulgaria to €39.3 in Belgium, the highest in the European Union.

In Germany, the hourly labour cost is €30.1 compared to France's €34.2. This German austerity in wages has often been decried in France where it is assimilated to unfair competition.

European Union

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