The Eurozone Crisis and the Competitiveness Legend

A widely accepted narrative of the European sovereign debt crisis is that it was due, at least in a large part, to a loss of competitiveness suffered by a number of countries. This article argues that this assertion is factually wrong. Working with the same data used to make the assertion, the article shows that the competitiveness loss view is the result of several misleading assumptions. When using a proper definition of competitiveness, the data reveal that whatever loss occurred was being corrected before the crisis erupted and was completely eliminated within three years. It also provides evidence that competitiveness changes have been endogenous to demand shocks. This implies that policies aiming at “restoring” competitiveness look at the symptoms, not the cause. © 2013 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.