Intra-European Differences in Wage and Productivity Growth: An Aside

The euro's real appreciation against the yen (and even against the dollar) affects some countries within the euro area much more than others. Before the advent of the euro in January 1999, all the potential member countries had to show substantial convergence in their CPI inflation rates (which they did) and to keep their nominal exchange rates stable for a year or more before entry. After the change to a common currency, wage costs and productivity within the Euro Area -and more generally in the European Union- were expected to gradually converge. For a fringe of the least developed, low per capita income, smaller countries -led by Ireland and some in Eastern Europe- rapid growth in their catch- up phases has led to some convergence.

Surprisingly, however, measures of competitiveness among some of the more mature industrial countries in the euro zone have diverged. Based on unit labor costs in manufacturing, Figure 12 [ PDF 108.2KB | 1 page ] compares the evolution of unit labor costs from 1999 through 2006 for Germany, Italy and France to the United States and Japan. Within the euro group, unit labor costs ranged from a rise of 20.8% in Italy to a fall of 13.5% in Germany. France was about the euro zone average: its manufacturing unit labor costs fell about 4%. The experiences of Greece, Portugal and Spain's are closer to Italy's, whereas Austria's is similar although not quite as good as Germany's (De Grauwe, 2006). Germany, with its large current account surplus, is much better in retaining its international competitiveness in the face of an appreciating euro.

Unsurprisingly, German politicians have been relatively silent about the problems of a strong euro (weak yen), whereas their Italian and French counterparts have openly criticized the European Central Bank for letting the euro get too strong because European interest rates are too high, and the Bank of Japan for letting the yen get too weak because Japanese interest rates are too low. Just what was the origin of "unduly low" interest rates in Japan, and why have they persisted for so long?

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