Competitiveness and the European Financial Crisis
Competitiveness and the European Financial Crisis
There are many ways to explain why Europe was so badly affected by the economic and financial crisis. One of the most popular arguments is that the peripheral countries of the Eurozone suffered from a lack of “competitiveness.” Lacking the ability to restore competitiveness through depreciation of their national currency, these countries were forced to undergo a long and painful process of macroeconomic adjustment. This argument is very plausible. The challenge is to test the underlying causal mechanism. This chapter uses macroeconomic data from the European Commission to see how well the various steps in the argument fit the experience of peripheral countries. What it finds is that the competitiveness argument—while plausible—is unpersuasive. Europe has suffered and these peripheral countries have experienced large and painful macroeconomic adjustments, but competitiveness is not the reason they got into trouble and these adjustments are not the solution to Europe’s problem.
Keywords: economic crisis, Eurozone, competitiveness, depreciation, macroeconomic adjustment
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