Structural Divergence and Crisis in the Eurozone: The Role of NAIRU Economics

The Eurozone sovereign debt crisis, triggered by the 2008–09 US financial crash, brought to light major macroeconomic imbalances in member countries that had been accumulating following the introduction of the common currency in 1999, but were masked by relatively good growth performance thereafter. The main symptoms of these intra-Eurozone imbalances are the high current account deficits and growing external debts in the Eurozone periphery, matched by high surpluses (and growing claims held by commercial banks) in its core. Stabilization of the Eurozone economy requires that these imbalances are reduced and, in order to do so, in 2012 the European Commission introduced a new macro-prudential surveillance framework—the Macroeconomic Imbalance Procedure (MIP)—to monitor these imbalances and help correct them. The main indicators in the MIP’s “imbalance scorecard” are the real effective exchange rate and nominal unit labour costs. Both are measures of price/cost competitiveness, and they make sense as warning signals only if the external imbalances have been caused by a loss of price (cost) competitiveness in the EU periphery relative to the core. This is indeed the communis opinioin policy circles in Brussels, Frankfurt and Washington, which holds that the periphery lost competitiveness because their wage growth exceeded productivity growth and hence their unit labor cost rose too much (OECD 2011; De Grauwe 2012; Ma and McCauley 2013), while at the same time domestic reforms improved German cost competitiveness (IMF 2011).