13 March 2012

Mario Draghi: Competitiveness of the euro area and within the euro area

"Taking the context of deeply malfunctioning credit markets, our recent decision on medium term liquidity has been central in banks returning to play their vital role in the real economy. Banks account for over two-thirds of external financing of firms in the euro area. Banks are especially important for small and medium-sized enterprises, which account for nearly three-quarters of employment in the private sector.

As many as 800 banks participated in our last operation. They cover virtually the entire euro area. Many of the banks are small, regional institutions. I cannot even mention their location, the towns, the villages where these banks are, because often they would be the only bank in town so they could be identified. This tells us one thing – that the money is now closer to households and the small and medium-sized enterprises than it was before.

Europe’s markets for goods and services clearly raise the potential for growth and job creation at little or no cost to the public purse. Continued efforts to promote stronger competition and further market integration within Europe are important tools for enhancing the global competitiveness of European firms.

In this vein, supportive national economic environments – including well-conceived physical and social infrastructures, sound public finances and, I should emphasise, stable financial systems – will all contribute to the competitiveness of the euro area.

External competitiveness

Euro area countries have changed their specialisation over the last two decades, but not all did so to the same extent. As a consequence, the specialisation of the euro area as a whole has not changed much. We could have expected that the euro area would have shifted more towards higher quality products and products that are more skill-intensive and capital-intensive.

The fact that there has not been more progress overall might reflect structural rigidities that constrain firms’ ability to adjust rapidly and to make substantial changes in their specialisation – particularly towards high-technology products.

In particular, rigidities in the product and labour markets make it difficult for firms to adjust costs and prices to changing conditions. The ability of countries to adopt the appropriate specialisation may also be limited by structural issues related to the quality of education and the incentives for innovation.

Internal competitiveness

A useful way to measure excessive imbalances is to look at unit labour costs, as these reflect developments in both productivity and labour costs. If we compare countries with an external surplus and countries with an external deficit, we see that, since the introduction of the euro, unit labour costs have increased by 28 per cent in deficit countries, 2.5 times as much as in surplus countries.

These misalignments have also become visible in terms of deviations from price stability. Indeed, we can observe that most countries with strong current account deficits prior to the crisis had also experienced substantial increases in prices. Ensuring price stability is key for competitiveness. It provides the nominal anchor for future price developments. It is key for the euro area as a whole as much as it is key for all countries. Significant and persistent deviations from price stability translate into losses of competitiveness and should be corrected. Restoring competitiveness is vital for a number of countries within the euro area. Policies to ensure sufficient responsiveness in wages and prices, as well as to boost productivity, are crucial ingredients in the rebalancing.

The policy challenge

The euro area’s performance in the global economy is good, but continuous adjustment is needed to keep up in a highly dynamic international environment. Within the euro area, a number of countries need to repair and strengthen their competitiveness for the sake of their own continued prosperity and the overall stability of our economic and monetary union. This process requires going to the root of the loss of competitiveness, tackling its sources and enhancing the opportunities for growth.

The timeframe of this correction will differ according to the degree of the imbalances and countries’ overall economic conditions. But in times of severe financial constraints, there is no other choice than to address the structural losses in competitiveness in an urgent and decisive manner.

What monetary policy can do for competitiveness is to ensure price stability in the euro area, reducing risk premia and making sure that all the transmission channels of the monetary impulse do work."

Full speech

© BIS - Bank for International Settlements