Euro Plus Monitor 2011

8/3/2019 Euro Plus Monitor 2011

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Euro PlusMonitorProgress Amid the turmoil

The2011


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Disclaimer

Thi dcment wa cmpied by the ecnmic depatment Jh. Beenbeg, Ge & C. KG, Beenbeg Bank. Beenbegha made any et t caey eeach and pce a inmatin. The inmatin ha been btained m ce whichwe beieve t be eiabe ch a, exampe, Thmn rete, Bmbeg and the eevant peciaied pe. Hweve, wed nt ame iabiity the cectne and cmpetene a inmatin given. The pvided inmatin ha nt beenchecked by a thid paty, epeciay an independent aditing fm. We expicity pint t the tated date pepaatin.The inmatin given can becme incect de t paage time and/ a a et ega, pitica, ecnmic the change.We d nt ame epnibiity t indicate ch change and/ t pbih an pdated dcment. The ecat cntained inthi dcment the tatement n ate etn, capita gain the accein ae the pena pinin the ath andwe d nt ame iabiity the eaiatin thee. Thi dcment i ny inmatin ppe. It de nt cntitte afnancia anayi within the meaning 34b 31 sb. 2 the Geman secitie Tading Act (Wetpapiehandegeetz),n invetment advice ecmmendatin t by fnancia intment. It de nt epace cnting egading ega, tax

fnancia matte. The pepaatin thi dcment i bject t egatin by Geman aw. The ditibtin thi dcmentin the jidictin may be eticted by aw, and pen, int whe pein thi dcment cme, hd inmthemeve abt, and beve, any ch etictin. Thi dcment i meant excivey intittina invet and maketpeina, bt nt pivate ctme. It i nt ditibtin t the e pivate invet pivate ctme.

Contents

Introduction ............................................................................................................... 2

Adjustment Progress Indicator .................................................................................. 91.1 Extena Adjtment ........................................................................................................10

1.2 Fica Adjtment ............................................................................................................121.3 swing in lab Ct Dynamic .....................................................................................15

Overall Health Indicator ............................................................................................172.1 lng-Tem Gwth Ptentia ...........................................................................................182.2 Cmpetitivene ..............................................................................................................282.3 Fica stainabiity .........................................................................................................352.4 reiience ........................................................................................................................42

Case Studies in Adjustment ..................................................................................... 50Gemany ...............................................................................................................................50

Geece ...................................................................................................................................53

Results by Country .................................................................................................... 55Atia ..................................................................................................................................56Begim ................................................................................................................................57Cyp ..................................................................................................................................58Etnia ..................................................................................................................................59Finand .................................................................................................................................60Fance ...................................................................................................................................61Gemany ...............................................................................................................................62Geece ...................................................................................................................................63

Ieand ................................................................................................................................. 64Itay .......................................................................................................................................65lxembg ..........................................................................................................................66Mata ....................................................................................................................................67Netheand ...........................................................................................................................68Ptga ................................................................................................................................69svakia .................................................................................................................................70svenia .................................................................................................................................71spain .....................................................................................................................................72

Acknowledgements ................................................................................................. 73


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1The 2011 Euro Plus Monitor

Policy Brie

The 2011 Ero Ps Monitor:

Proress Amid the Trmoi

Project TeamHolger Schmieding (principal author), Paul Hofheinz, Jrn Quitzau, Anja Rossenand Christian Schulz

Principal author Holger Schmieding is chief economist of Berenberg Bank, Germanys oldest private bank, foundedin 1590. Previously, Dr. Schmieding was economist at the International Monetary Fund, head of research onCentral and Eastern Europe at the Kiel Institute of World Economics and chief economist Europeat Bank of America-Merrill Lynch.

The authors would like to thank Hamburgisches WeltWirtschaftsInstitut (HWWI) for their assistance witheconometric modeling and data collection as a substantial part of this project. See alsowww.hwwi.org.

The ideas expressed in this policy brief are those of the named authors alone and do not necessarily representthe views of the Lisbon Council, Berenberg Bank or any of their associates.

Holger Schmieding


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2 The 2011 Euro Plus Monitor

How is the European economy aring? Who hasthe strongest underlying position? And who isimproving the astest? Tese are the questionswe set out to answer in The 2011 Euro PlusMonitor,produced by Berenberg Bank andthe Lisbon Council.1 Te publication appearsthis year or the rst time, and is intended toinorm and enrich public debate about ways toimprove economic perormance and strengthenthe resilience against nancial crises. It is alsomeant to eed into and accompany the Euro PlusPact, launched and championed by the EuropeanCouncil earlier this year, to provide a much-needed growth and competitiveness componentto recent European reorm agendas.2

Te 2011 Euro Plus Monitor evaluates and ranksthe 17 countries o the eurozone based on two keycriteria.3 First and oremost, it looks at countriesunderlying economic strength, calculatedhere as an Overall Health Indicator basedon our key sub-indicators (long-term growthpotential, competitiveness, scal sustainabilityand undamental resilience to nancial shocks).4But economies are not stagnant pictures. o thecontrary, parts o the European economy areimproving quickly a act which the steady trickleo negative crisis-related news has sometimesobscured rom view. o shed more light on theprogress being made at the country level, we setout to measure not just the overall situation o the17 countries o the eurozone, but the speed, scope

and eectiveness with which these countries areadjusting. Te result is theAdjustment ProgressIndicator a second composite indicator thatdoes not assess the recent situation (or instance,how wide is a countrys scal decit?) butexamines the dynamics o change (or instance,how ast is the decit now alling?). Moreprecisely, the Adjustment Progress Indicator looksat three sub-indicators, namely 1) the externaladjustment, 2) the scal adjustment, and 3) thechange in real unit labour costs.5 Te goal is togive a nuanced picture not just o where countriesstand, but o who is (or is not) improving quicklyenough to provide the basis or sustainableeconomic growth and social prosperity.We summarise the results in tables 1 and 2 onpage 3 and chart 1 on page 4 o this policy brie.Te outcome in individual countries is discussedand evaluated in the individual country proles,which begin on page 56.

Our results show, rst and oremost, that:

1. Te eurozone as a whole is turning into amuch more balanced and potentially moredynamic economy. Many o those countriesmost in need to adjust, as shown by lowrankings in the Overall Health Indicator, arenow making the greatest progress towardsrestoring their scal balance and externalcompetitiveness, as shown by high rankingsin the Adjustment Progress Indicator.

Parts o the European economy are improving quickly a act which the steady trickle o negative crisis-related news has sometimes obscured rom view.

1. Berenberg Bank and the Lisbon Council would like to thank Hamburgisches WeltWirtschatsInstitut (HWWI) or theirassistance with econometric modeling and data collection as a substantial part o this project.

2. For details on the Euro Plus project, see European Council, European Council Conclusions, EUCO 10/1/11 REV 1, 24-25March 2011 (Brussels: European Council, 2011).

3. For reasons o scale and scope, the Euro Plus Monitor is limited to the 17 eurozone countries: Austria, Belgium, Cyprus,Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and

Spain. Amongst non-eurozone members o the European Union, Bulgaria, Denmark, Latvia, Lithuania, Poland and Romaniahave also expressed a willingness to adhere to the Euro Plus Pact.

4. The calculations or the Overall Health Check Indicator are based on backward-looking hard data.5. The calculations in the Adjustment Progress Indicator are mostly based on hard data but also partly on European

Commission orecasts and Berenberg Banks own orecasts and adjustments.


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Table 1: Countries Ranked by Adjustment Progress Indicator

Rank Country Total Score External Fiscal RULC

1 Estonia 8,4 9,9 5,6 9,8

2 Greece 6,6 6,4 8,2 5,2

3 Ireland 6,5 7,0 4,5 7,9

4 Malta 6,4 7,9 4,4 7,0

5 Spain 5,7 6,5 7,5 3,1

6 Slovakia 5,0 5,0 5,7 4,47 Portugal 4,9 5,1 6,4 3,2

8 Netherlands 4,0 3,2 5,1 3,8

9 Luxembourg 4,0 3,3 1,9 6,8

10 Finland 3,8 0,5 3,5 7,5

11 Slovenia 3,6 4,6 3,6 2,6

12 Italy 3,3 2,3 4,7 2,9

13 Cyprus 2,9 4,0 3,4 1,3

14 Belgium 2,6 2,8 1,6 3,3

15 France 2,5 2,5 3,9 1,3

16 Germany 2,2 1,6 3,7 1,1

17 Austria 2,1 3,2 1,6 1,6

Euro17 3,2 3,0 4,5 2,2

Table 2: Countries Ranked by Overall Health Indicator

Rank Country Total Score Growth Competitiveness Fiscal Sustainability Resilience

1 Estonia 7,4 5,6 6,4 9,3 8,2

2 Luxembourg 7,3 7,1 6,4 9,2 6,6

3 Germany 6,8 6,6 7,9 6,0 6,7

4 Netherlands 6,8 7,5 8,2 5,8 5,8

5 Slovenia 6,6 6,2 6,7 5,6 7,7

6 Slovakia 6,3 5,2 6,7 6,6 6,8

7 Finland 6,2 6,2 4,5 7,1 7,2

8 Austria 5,6 6,1 5,3 5,0 6,1

9 Belgium 5,6 5,5 6,7 5,0 5,2

10 Ireland 4,7 4,7 7,0 3,5 3,7

11 Malta 4,6 4,2 6,4 5,4 2,4

12 Spain 4,5 3,4 3,8 5,8 5,1

13 France 4,5 4,7 3,7 4,1 5,3

14 Italy 4,4 3,2 4,1 4,8 5,4

15 Portugal 3,8 3,2 4,8 3,8 3,6

16 Cyprus 3,8 3,8 2,4 6,3 2,8

17 Greece 3,0 4,0 2,7 2,2 2,9

Euro17 5,5 5,0 6,2 5,5 5,3

For the scores, we ranked all sub-indicators on alinear scale o 10 to 0, with 10 or the best and0 or the worst. In most cases, we calibrated thelinear scale so that the top perorming countrywas slightly below the 10 benchmark and theworst perorming slightly above the 0 bottom,leaving some room or urther changes in thereadings in coming years within the 10 to 0scale. For some indicators, small countries hadresults so ar outside the range o the readingso others that we did not use these outliers to

dene the upper or lower end o the range.We accorded these outliers the top score o 10or the bottom score o 0, respectively.

The composition o gross domestic productusually changes with rising levels o per capitaincome. We thus adjusted the annual averagegrowth in non-construction gross valueadded per labour orce, as well as the shareo government outlays in GDP or per capitaGDP. Separately, we adjusted the shareo exports in GDP or the size o a country(nominal GDP) and its level o development(per capita GDP). For urther details,see the description in the text on the

various sub-indicators.

Notes


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2. All our o the eurozone periphery countriesdisparagingly labelled PIGS Portugal(No. 7), Ireland(No. 3), Greece (No. 2)and Spain (No. 5) place within the topseven countries in the Adjustment ProgressIndicator and within the top six in theExternal Adjustment sub-indicator.Te sizable gains in these countries netexports show that it is possible to correcteven major imbalances within the conneso monetary union. While domestic demandhas turned into the main driver o theGerman economy, a dramatic turnaround

in net exports is cushioning the adjustmentcrisis on the eurozone periphery.

3. Eurozone members are going througha wave o sweeping structural and scalreorms and a major overhaul o governancestructures while other more heavily indebtedeconomies (such as the US and Japan) arenot. I the eurozone gets through the currentacute crisis and continues to make steadyprogress at the national level o the typecaptured in this policy brie, Europe couldyet lead the global economy on a host o

The eurozone as a whole is turning into a much morebalanced and potentially more dynamic economy.

0246810 1086420

Adjustment Progress Indicator Overall Health Indicator

1. Estonia

2. Greece

3. Ireland

4. Malta

5. Spain

6. Slovakia

7. Portugal

8. Netherlands

9. Luxembourg

10. Finland

11. Slovenia

12. Italy

13. Cyprus

14. Belgium

15. France

16. Germany

17. Austria

Euro17

Chart 1: Eurozone Countries Ranked by Adjustment Progress IndicatorThe right hand column indicates the countrys relative ranking in the Overall Health Indicator

Source: Berenberg Bank


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6. In 2000, European leaders vowed to make Europe the most competitive and dynamic knowledge-based economy in theworld capable o sustainable economic growth with more and better jobs and greater social cohesion. An earlier LisbonCouncil study showed that, had crisis not intervened, Europe was surprisingly on track to meet that goal, with excellentpre-crisis perormance, particularly in job creation and productivity improvements.

perormance-based criteria, as Europeanleaders vowed to do in 2000.6

4. Te evidence presented in this policy brieshows that the o-heard suggestion that crisiscountries like Greece, Portugal and Spain needto leave the common currency to regain theirexternal balance is wrong. Instead, the changesorced by the crisis have put the eurozone ontrack or a major convergence between core

and peripheral countries. Countries that havebeen lagging behind (such as Greece andPortugal) are mending their ways. Conversely,some o the countries that have little need toadjust (such as Germany), as shown by toprankings in the Overall Health Indicator, arerelaxing the scal reins and reducing theirexternal surpluses because they can aordit. Tey thus show up with low scores in theAdjustment Progress Indicator.

I the eurozone gets through the current acute crisisand continues to make steady progress at the nationallevel, Europe could yet lead the global economyon a host o perormance-based criteria.

Greece: Industrial Orders from Abroad RiseIndex levels, three month moving averages

Greece is reeling under a severe squeeze o domestic demand. But Greece is adjusting.While domestic orders are plunging, export orders are surging. However, exports o goodsaccount only or 8% o Greek GDP. Greece also needs a turnaround in tourism and in receiptsor transport services. Whereas tourist arrivals are growing (especially outside Athens), receiptsor transport services still look weak. As the transport industry tends to be very ootloose,higher taxes and stronger tax enorcement may be driving part o that industry abroad.

Source: Eurostat

Domestic Foreign

60

80

100

120

140

160

Jan 02 Jan 04 Jan 06 Jan 08 Jan 10

2005

=1

00


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7. As o November 2011, the six eurozone countries with AAA rating were Austria, Finland, France, Germany, Luxembourgand the Netherlands.

5. Greece is a point in case. While it comes inlast among the 17 eurozone countries in theOverall Health Indicator, it is among theastest changing economies, ranking No. 2 inthe Adjustment Progress Indicator, ahead oIreland(No. 3), Malta(No. 4) and Spain(No 5), and well ahead oItaly(No. 12)and France (No. 15). Greece has adjusted intwo major and closely intertwined respects:through an exceptionally harsh scal squeeze,Athens has slashed its underlying scaldecit and curtailed its appetite or importsin a dramatic way. As a result, its net importposition has become much less negative.Once the Greek economy returns to growth,Greece looks set to enjoy a huge scalimprovement. Te turnaround in Greecesunderlying scal and competitiveness positionsindicates that the widespread perception thatGreece is a bottomless pit and that taxpayersare being asked to throw good money aer badis wrong at least i policy makers prevent thecurrent crisis rom spiralling out o control.

6. Te extreme experience o Greece points to anurgent need to reocus the European debateaway rom short-term austerity towards thelong-term pro-growth reorms that are thehallmark o the Euro Plus Pact. For Greece,the ocus should be on removing red tape,opening up markets and restoring growth bycreating better conditions or investment, andnot on imposing ever greater scal austerity.Adjustment programmes negotiated with theIMF, European Commission and EuropeanCentral Bank should thus ocus on such stepsto enhance the long-term growth potential.Such a policy would in itsel do much to correctthe remaining Greek scal imbalances (see theGreece country prole on page 63 or more).

7. Alarm bells should be ringing or France.Among the six eurozone countries withan AAA rating, France achieves by arthe lowest ranking in the overall healthcheck. Te results are too mediocre or acountry that wants to saeguard its placein the top league.7 Specically, Franceranks No. 13 on the Overall Health CheckIndicator, just ahead oItaly(No. 14)but slightly behind Spain (No. 12).Even worse, we see little adjustment progressor France in the last two to three years inthe Adjustment Progress Indicator, whereFrance comes in at No. 15, behind Belgium(No. 14) and Cyprus (No. 13). Countriesin rude overall health such as Germanyhave little need to adjust. But or a countrywith signicant health problems such asFrance, the lack o adjustment is a concern.In most criteria used to rate progress inthe Euro Plus Monitor, France nds itselwith scores closer to Spain and Italy thanto other AAA-rated European countrieslike Germany, Austria and the Netherlands.Saeguarding Frances position in the topleague o European economies will requiresignicant reorms, ideally starting ahead othe next French presidential election. Andwhoever wins the next election, chances arethe post-election administration will haveno choice but to either adopt unpopularreorms immediately or to adopt themwith a vengeance a little later aer urtherserious slippage in the French perormancerelative to Germany. Specically, Franceneeds to rein in government consumption,improve education prospects especially orits immigrant population and make betteruse o its well-talented workorce. Franceneeds to make it easier or companies

The ot-heard suggestion that crisis countries likeGreece, Portugal and Spain need to leave thecommon currency to regain their external balanceis wrong.


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to hire people by reducing the degreeo employment protection that avoursthe privileged insiders over those lookingto get a job.

8. Italyranks only No. 14 on the OverallHealth Indicator. It suers mostly roma very low rate o trend growth andoverregulated service markets. Lowproductivity growth rooted in excessiveregulations is the Achilles heel o the Italianeconomy. Italy is also lagging behind in itsadjustment eorts, coming in only as No. 12on the Adjustment Progress Indicator.A high share o government expenditurein GDP suggests that Italy needs sustainedspending restraint and pro-growth structuralreorms rather than tax hikes to improve itsscal position urther. I Italy chose seriousstructural reorms that could unleash itseconomic potential, it would have little needor a signicant scal squeeze courtesy o itscomparatively healthy primary scal balance.

9. Estonia, with 1.28 million people and 14.3billion gross domestic product, comes out ontop o the Euro Plus Monitor, placing No. 1in both the overall health and the adjustmentprogress indicators. Estonias success reectsthe inherent vigour o the Baltic tiger aswell as the act that allinn has alreadyhad more time or its adjustment eorts toshow results. Te Estonian bubble burstwell beore the Greek debt crisis erupted,orcing Estonia to correct some excessesearly on. In the case o Greece, the overalladjustment is still in its painul rst phase inwhich a collapse o imports, layos o least

productive workers and severe downwardpressure on wages improve the externalbalance and the competitive position.Estonia and to a lesser extent Ireland(No. 3, on the Adjustment Progress Indicator) have already progressed to the secondphase o adjustment in which surging exportsand productivity-boosting private sectorinvestment drive the adjustment urther.Beyond doing well, Estonia is also preparingitsel well or the uture.

10. Among the more interesting developmentsis that wage pressures within the eurozonehave started to converge (see chart 4 onpage 16 or more). In terms o real unitlabour costs, 12 o the 17 eurozone countrieshave reversed their positions relative to theeurozone average since 2008, either movingrom below- to above-average increases inreal unit labour costs or vice versa. Whereaswage moderation has ended in Germanyand Austria, it has taken hold in much o theperiphery. Tis is important because it meansserious structural adjustments can happen and are happening within the conneso the monetary union. And the eurozoneitsel is moving closer to the denition oan optimal currency union.8

11. Germanycomes across as a near-perectreorm success story. Te legacy o post-unication ollies le the erstwhile sickman o Europe (as Germany was describedin The Economistnewspaper in 1999)9 nochoice but to undamentally reorm itsel inthe years aer 2003. Having returned to rudehealth by 2006, as a result o oen difcult

The changes orced by the crisis have put theeurozone on track or a major convergence betweencore and peripheral countries.

8. See Robert A. Mundell, A Theory o Optimum Currency Areas, The American Economic Review, Vol. 51, No. 4(Pittsburgh: American Economic Association, 1961).

9. See also Holger Schmieding, Germany: The Sick Man o Europe? Merrill LynchEuropean Monitor(London: Merrill Lynch, 1998).


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and unpopular reorms that eventually costthen-Chancellor Gerhard Schrder his job,neither the post-Lehman slump nor thesovereign debt crisis have exposed a majorneed to adjust urther. Germanys relativelyhigh ranking (No. 3) on the overall healthcheck, coupled with its extremely low score No. 16 out o 17 places or post-2008adjustment reects this. Te recent reboundin German wage ination (rom verysubdued to essentially normal), a modestscal relaxation and a shi rom net exportsto domestic demand are part and parcel ointra-euro convergence rather than causes orconcerns.

12. Spain is making relatively speedy progress.It ranks No. 5 on the Adjustment ProgressIndicator, though its No. 12 spot on theOverall Health Indicator shows that itstill has a lot o adjustment ahead. Itsoverall health is still held back by sluggishprogress in developing an alternative to theconstruction-based growth o the pre-2007period and even more so by the dismal stateo its labour market. A serious labour marketreorm, perhaps aer the election on 20November, could turn Spain into one o themore dynamic economies o the eurozone.

13. Te Netherlands ranks No. 8 on theAdjustment Progress Indicator and No. 4 onthe Overall Health Indicator, while Slovakianishes at No. 6 on both the AdjustmentProgress Indicator and the Overall Health

Indicator. Tese two otherwise dissimilarcountries are among the ew economieswhich can boast signicant adjustmentprogress despite enjoying airly robustoverall health already. With its No. 4 nish,the Netherlands has the edge in terms olonger-term undamentals, while SlovakiasNo. 6 nish in adjustment progress givesit the better score on embracing anddelivering improvement.

14. Cyprus is a potential problem. Its No. 16result on the Overall Health Indicator ismatched with an almost equally lowNo. 13 nish on the Adjustment ProgressIndicator. While it enjoys a slightly bettereconomic starting situation than Greece, ithas not gone through any o the potentiallygrowth-enhancing adjustments that Greecehas. However, with 800,000 people andannual GDP o 17 billion, it weighs littleon Europes overall economic perormance.

15. Even the poor perormers should take heart,as there is a hidden upside in many o thelow scores. Low rankings in some key sub-indicators which will be discussed below also mean that these countries could raise theirperormance noticeably by addressing thesespecic shortcomings. Tree examples are labourmarket and education reorms in France, labourmarket reorms in Spain and a deregulation othe service sector coupled with serious cuts inthe red tape that is obstructing the opening andgrowth o new businesses in Italy.

The extreme experience o Greece points to anurgent need to reocus the European debate awayrom short-term austerity towards the long-termpro-growth reorms that are the hallmark o the

Euro Plus Pact.


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A good score on the Adjustment ProgressIndicator shows that countries are getting resultsin the key areas that their scal and structuralreorms are meant to address. Estonia(No. 1)comes out on top. But Malta(No. 4) and theamous PIGS Portugal (No. 7), Ireland(No 3), Greece (No. 2) and Spain (No. 5) alsodominate the top o the ranking.11 Tis is a signthat reorms and the pains o adjustment areshowing results in these countries.

A low score on the Adjustment Progress Indicatorcan mean two things. It can show that countriesdid not adjust because they did not want to.Tis seems to be the case in France (No. 15).But it can also signal that countries did not adjustmuch because they did not need to. Tis is the casewith Germany(No. 16) andAustria(No. 17).Tese countries score well in the Overall HealthIndicator, where Austria ranks No. 8 and Germanyranks No. 3. Tis means these countries can aorda relatively relaxed scal stance, an above-averagerise in real unit labour costs and a aster rise inimports than exports. Low German and Austrianscores or recent adjustment progress are part othe convergence within the eurozone towards bestpractice. For France, however, its low rankingin Adjustment Progress (No. 15) is not oset bya similarly high perormance in Overall Health(where it ranks No. 13). In other words, unlikeAustria and Germany, France looks much shakieron its long-term undamentals. In France, the lacko major adjustment progress is a genuine concern.

Once the Greek economy returns to growth,Greece looks set to enjoy a huge scal improvement.

10. To some extent, our scal analysis may be outdated by the time this report is published. We rely on European Commissionprojections published on the European Commission homepage on 03 September 2011. We thus do not incorporate morerecent scal initiatives and results. Also, the overall Greek scal-adjustment need may now be judged to be bigger thanestimated beore, refecting the unexpected depth o Greek recession. But in the case o Greece, the likely debt reliecan mitigate such extra need or austerity. In addition, the depth o the recession there also raises the chances o a astersnapback in real and nominal GDP once the gloom lits.

11. Slovakia is No. 6 a great score or a country that also ranks airly high (No. 6) on the Overall Health Indicator.

Te European debt crisis has orced a substantialadjustment on a number o European economies.o correct past excesses in public and privatespending, governments and households need toconsume less relative to what they produce andearn. In economic statistics, this should show upin three major ways: 1) in a reduced scal decitat home, 2) in a rise in exports relative to importsin the external accounts, and 3) in a correction inreal unit labour costs orced by the crisis and thescal squeeze.10

Te Adjustment Progreess Indicator is separaterom the Overall Health Indicator, which we willpresent and describe in the next section. Whereasthe Overall Health Indicator ranks countries ortheir undamental position on a wide array osub-indicators that determine long-term growthpotential, scal sustainability and undamentalresilience to external shocks, the AdjustmentProgress Indicator tracks the progress countriesare making at the moment on the most importantshort- to medium-term adjustment criteria.o calculate this, we ocus on three measures oadjustment which we will discuss in this section:1) reduction and/or changes in the scal decit,2) the rise (or all) in exports relative to imports inthe external accounts, and 3) the changes in unitlabour costs relative to other eurozone members.Once we have calculated these gures or eachcountry, we average out the three sub-indicatorsto give an overall Adjustment Progress Indicatorscore and a ranking to each country.

I. Adjustment Progress Indicator


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I.1 External Adjustment: Swing in Net Exports

The European debt crisis has orced a substantialadjustment on a number o European economies.

Table 3: Shit in Net Exports 2007-11

External Adjustment Change in Net Exports Rise in Export Ratio

Relative to GDP Relative to Starting Level

Rank Country Score Score % Score % Score Score % o GDP

1 Estonia 9,9 9,8 23,2% 9,8 30,1% 9,9 10,0 30,9%

2 Malta 7,9 7,4 16,7% 7,8 17,8% 7,1 7,1 9,7%

3 Ireland 7,0 7,0 15,7% 7,6 15,4% 6,5 8,7 13,8%

4 Spain 6,5 7,2 8,3% 5,4 26,8% 9,1 3,9 1,8%

5 Greece 6,4 7,5 7,3% 5,1 30,3% 10,0 2,8 -1,0%

6 Portugal 5,1 5,5 5,6% 4,6 15,1% 6,4 3,8 1,4%

7 Slovakia 5,0 4,7 6,7% 4,9 6,9% 4,5 4,2 2,4%

8 Slovenia 4,6 4,9 6,6% 4,9 8,9% 5,0 3,6 0,9%

9 Cyprus 4,0 4,1 3,3% 3,9 6,2% 4,4 0,3 -7,3%

10 Luxembourg 3,3 3,1 0,8% 3,2 0,4% 3,0 5,0 4,6%

11 Austria 3,2 3,0 0,3% 3,0 0,4% 3,0 2,3 -2,2%12 Netherlands 3,2 3,0 0,3% 3,0 0,3% 3,0 5,5 5,9%

- Euro17 3,0 2,9 0,0% 3,0 0,1% 2,9 3,6 1,1%

13 Belgium 2,8 2,9 -0,2% 2,9 -0,2% 2,9 3,5 0,8%

14 France 2,5 2,5 -0,7% 2,7 -2,5% 2,3 3,1 -0,3%

15 Italy 2,3 2,2 -1,2% 2,6 -4,3% 1,9 2,4 -2,0%

16 Germany 1,6 2,3 -1,8% 2,4 -3,5% 2,1 4,2 2,5%

17 Finland 0,5 0,6 -6,3% 1,1 -12,4% 0,0 0,3 -7,2%

I a country that has lived beyond its meansis adjusting well, the success should show upmost visibly in an improvement in its externalaccounts. o track the progress, we examine twodierent aspects o external adjustment, namely1) the shi in the balance o exports and imports(net exports), and 2) the rise in the ratio oexports in a countrys GDP.

We nd that several o the smaller economiesthat were living well beyond their means until2007 (or in some cases 2009) turned theirexternal balance around convincingly. Estonia(No. 1) managed the most impressive shi in

its external balance with a cumulative swingin its net export position o 23.2% o its GDPsince the second hal o 2007, ollowed byMalta(No. 2, with a 16.7% swing) and Ireland(No. 3, with a 15.7% swing). Te shis are alsoquite impressive or Spain (No. 4, with a 8.3%change), Greece (No. 5, with a 7.3% shi) andSlovakia(No. 7, with a 6.7% change). At theother end o the spectrum, Germany(No. 16)reduced its net export surplus by 1.8% o itsGDP while Finland(No. 17) raised its importsrelative to exports so much that it recorded ashi o -6.3% points. Tese shis are appropriateor well-perorming economies and represent


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an important re-balancing o demand withinthe euro-area itsel.

O course, a mere look at the shi in the balanceo exports and imports as a share o GDPis somewhat unair. Small, open economiesnd it much easier to shi resources rom thedomestically oriented to the export- or import-competing sectors than larger and more closedeconomies. o account or this, we chose to looknot just at the shi in the relative balance oimports and exports, but also at the cumulativeshi in a countrys net export position relative tothe starting level o 2002.

o some extent, the results are similar: Estoniaand Irelandstay close to the top and Germanyclose to the bottom o the list, conrming amajor rebalancing, with Estonia and Ireland

moving rom decit to surplus and Germanyreducing its external surplus in a meaningul way.But the big news is that three o the eurozonecrisis economies, namely Greece,Portugaland Spain, have moved up signicantly inthe ranking, as chart 2 above shows. Relativeto their comparatively low ratio o exports intheir GDP in the second hal o 2007, thesecountries achieved major shis. Ranked in thisway, Greece does even better than Estonia, theerstwhile winner in this category.

A closer look at the drivers o adjustment revealsa dark side to the external adjustment story: insome countries, the net export position improvedsolely through a collapse in imports, not throughan actual rise in exports, as chart 2 shows.Te prime example is Greece which even sueredan estimated drop in the share o exports in GDP

The eurozone itsel is moving closer to the denitiono an optimal currency union.

Greece

Estonia

Spain

Malta

Ireland

Portugal

Slovenia

Slovakia

Cyprus

Luxembourg

Austria

Netherlands

Belgium

France

Germany

ItalyFinland

Euro17

ExportsNet Exports

-10% 40%-20% 0 10% 20% 30% 50%

Chart 2: Swing in ExportsChange in export share in GDP 2H 2007 to 2Q 2011; relative to starting levelChange in net export share in GDP 2H 2007 H2 to 2Q 2011, relative to 2H 2007 share o exports in GDP

Source: Eurostat, Berenberg calculations


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by a percentage point between the second hal o2007 and the second quarter o 2011. For Cyprus(No. 9),Austria(No. 11), France (No. 14), Italy(No. 15) and Finland(No. 17), the share oexports in GDP has also declined over this period.On the opposite end o the scale lies Estonia(No. 1). Te small Baltic country can attributethe rise in its net exports solely to an increase inexports as a share o its GDP.

However, comparing the countries currentlysuering rom the sovereign debt crisis to

Germany comes across as a near-perect reormsuccess story.

Estonia can be misleading. Estonia startedits own wrenching adjustment much earlier.In Estonia, imports also ell sharply in the rstphase o the crisis (by 41% within two years)beore recovering equally rapidly thereaer.Te initial import adjustment or Estonia wasmerely the prelude to a major export boom.Greece, which started the harsh phase o its ownadjustment less than two years ago, could stillsee stronger exports rather than a all in importsdominating the urther improvement in its netexport position.

I.2 Domestic Adjustment: Underlying Fiscal Decit

Table 4: Fiscal Squeeze: Shit in Primary Balance

2009-11 in % o GDP in % o required shit

Rank Country Score % Score Rank % Score Rank

1 Greece 8,2 8,2 9,7 1 47,3 6,7 5

2 Spain 7,5 4,7 6,4 2 65,5 8,5 2

3 Portugal 6,4 4,7 6,4 2 n.a. n.a. n.a.

4 Slovakia 5,7 2,8 4,6 4 48,9 6,9 4

5 Estonia 5,6 -0,8 1,1 15 - 10,0 1

6 Netherlands 5,1 1,0 2,9 10 52,8 7,3 3

7 Italy 4,7 1,3 3,1 7 42,2 6,2 8

- Euro17 4,5 1,3 3,1 - 38,4 5,8 -

8 Ireland 4,5 2,2 4,0 5 29,1 4,9 10

9 Malta 4,4 0,2 2,1 12 46,3 6,6 6

10 France 3,9 1,9 3,7 6 20,9 4,1 12

11 Germany 3,7 -0,9 1,0 16 44,1 6,4 7

12 Slovenia 3,6 1,1 3,0 9 22,9 4,3 11

13 Finland 3,5 0,1 2,0 13 - 5,0 9

14 Cyprus 3,4 1,2 3,0 8 18,2 3,8 13

15 Luxembourg 1,9 -1,1 0,9 17 - 3,0 14

16 Belgium 1,6 0,6 2,5 11 -12,5 0,8 16

17 Austria 1,6 -0,3 1,6 14 -5,0 1,5 15

Required shit: Cumulative shit needed until 2020 to achieve a 60% debt ratio in 2030.Source: European Commission, Berenberg calculations


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Shis in the scal policy stance also show upclearly in the underlying primary balance othe general government accounts. o avoiddistortion, we use data that adjust the actualscal balance or the impact o the short-termbusiness cycle, interest payments and someone-o actors.

aking 2010 and mid-year estimates or thelikely result or 2011 together12, we nd majorprogress in many countries in two key areasrelative to the 2009 starting situation:

Tose countries most in need o reining intheir excessive decits have made seriousprogress, with Greece well ahead o Portugaland Spain.

A number o countries with a airlycomortable scal starting position,including Germany, Austria and Estonia,have slightly relaxed their scal reins overthese years.

Serious tightening in the scally challengedperiphery and some modest scal stimulus inparts o the core have resulted in a signicantconvergence o scal policy in the eurozone as awhole. As required, the overall underlying primarydecit or the eurozone as a whole has declinednoticeably to 0% o GDP over this period, downrom 1.4% in 2009. But this aggregate tighteninghas not been so aggressive as to be a serious threatto aggregate demand growth.

Looking at individual results, Greece (No. 1) hasundergone the most wrenching scal squeeze,with an improvement in the underlying primarydecit by 8.2% o its GDP within two years

(see chart 3 on page 14 or an illustration o this).By comparison, the adjustments in Spain (No. 2,at 4.7%), Portugal (No. 3, at 4.7%) and Ireland(No. 8, with a tightening o 2.2%) are muchmore modest. No wonder Greece has alleninto a deep recession whereas the other crisiscountries still managed to expand modestly at least until the overall eurozone economyturned down in autumn 2011.

O course, the size o the scal squeeze tells onlyhal the story. We have to relate it to the actualadjustment need. For this, we use a slightlydierent calculation. Te European Commissionhas estimated how much countries must shitheir underlying primary balance between 2010and 2020 to get to a decit-to-GDP ratio o 60%by 2030.13 We take these numbers includingtheir underlying assumptions and add twoeatures, namely the actual adjustment progress in2010 over 2009 and the European Commissionestimate o the likely progress to be made in 2012over 2010 based on policies that had already beenimplemented by mid-2011. We then calculatehow much o the overall required shi in stancebetween 2009 and 2020 to get to a 60% debt-to-GDP ratio by 2030 has already been achieved in2010 and 2011 or is already in the pipeline or2012 due to measures passed until mid-2011.

On this measure, Estoniacomes in at No. 1, asable 4 on page 12 shows. It could even aord torelax scal policy slightly and still keep its debtburden (an estimated 6.9% o GDP in 2011)below 60% o GDP by 2030. Some major corecountries such as Germany(No. 7) and theNetherlands (No. 3) also score well becausethey have little need to adjust their scal stance.

Serious tightening in the scally challenged peripheryand some modest scal stimulus in parts o the corehave resulted in a signicant convergence o scalpolicy in the eurozone as a whole.

12. All calculations rely on European Commission estimates o the underlying primary balances in 2011. These estimates aresubject to change. But the shits in these balances are so signicant that even modest revisions to the data would beunlikely to invalidate the conclusions presented here.

13. European Commission, Public Finances in EMU 2011 (Brussels: European Commission, 03 September 2011).


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Greece

Portugal

Spain

Slovakia

Ireland

France

Euro17

Italy

CyprusSlovenia

Netherlands

Belgium

Finland

Austria

Estonia

Germany

Luxembourg

Malta

2 4 6 8-2 0 10

Among the scally-challenged parts o theeurozone, Spain (No. 2) scores particularlywell, having already acted to achieve 65% o theoverall required scal squeeze. Greece (No. 5)also stands out with an adjustment so ar thatamounts to almost hal o the overall need until2020. On the opposite end o the spectrum wend Belgium (No. 16) which has an above-average need to adjust until 2020 but hadactually relaxed scal policy slightly aer 2009.

For the overall scal adjustment score, wecombine both measures: 1) the estimated totalshi in 2010 and 2011 in absolute terms, and2) the adjustment so ar relative to the totaladjustment need until 2020. Measured in this

way, Greece (No. 1) comes top, ollowed bySpain (No. 2), Portugal (No. 3)14, Slovakia(No. 4) and Estonia(No. 5). Te Netherlands(No. 6), Italy(No. 7), Ireland(No. 8) andMalta(No. 9) are trailing behind the bestperormers but still achieve respectable results.

Te mediocre rankings or Germany(No. 11),Finland(No. 13), Luxembourg(No. 15) and

Austria(No. 17) need to be seen in context: whilethey do show that these countries have done hardlyany scal tightening recently, the overall needor these countries to adjust is also comparativelysmall. For France (No. 11), the below average scaladjustment is a greater concern because the countryhas an above-average need to adjust.

14. The data or Portugal are incomplete, with no estimate o how much o the required shit in its scal balance until 2020Portugal has already achieved.

To correct past excesses in public and privatespending, governments and households need toconsume less relative to what they produce and earn.

Chart 3: Fiscal Adjustment 2009-2011 (in Percentage o GDP)Change in underlying primary scal balance

Source: Eurostat, European Commission, Berenberg estimates


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Labour costs are a very imperect gauge ocompetitiveness. Te ultimate yardstick ocompetitiveness is whether or not a company orcountry can protably sell its wares. But as otheractors such as changes in product quality, brandvalue, consumer tastes and in the mix o goodsand services oered by a company or a countryare oen longer-term processes, changes in realunit labour costs do provide insights into thenear-term adjustment dynamics o a country.Tis holds especially i a decline in real unitlabour costs goes along with a rise in net exports,indicating that a country has indeed improvedits competitive position.

o gauge adjustment progress, we examinehow much changes in real unit labour costsare deviating rom the eurozone average.We conduct our analysis in two steps. First, wecalculate the cumulative change in real unitlabour costs between 2009 and 2011 and rankcountries according to their deviation rom theeurozone average, awarding the highest rankingto the country with the biggest relative all.Second, we relate this to what had happenedin the period 2000-2009, awarding the highestranking to the country which has made thebiggest shi rom above-average in the earlierperiod to below-average in the crisis period.We then derive an overall ranking by combiningthese two components.

Unsurprisingly, two small, open and highlyexible economies which had granted

I.3. Swing in Labour Cost Dynamics

I a country that has lived beyond its means isadjusting well, the success should show up most visiblyin an improvement in its external accounts.

Table 5: Real Unit Labour Costs 2009-11

Rank Country Score

1 Estonia 9,8

2 Ireland 7,9

3 Finland 7,5

4 Malta 7,0

5 Luxembourg 6,8

6 Greece 5,2

7 Slovakia 4,4

8 Netherlands 3,8

9 Belgium 3,3

10 Portugal 3,2

11 Spain 3,112 Italy 2,9

13 Slovenia 2,6

- Euro17 2,2

14 Austria 1,6

15 Cyprus 1,3

16 France 1,3

17 Germany 1,1

themselves by ar the highest rise in real unitlabour costs in the years 2000 to 2009,Estoniaand Ireland, also had to undergo someo the most wrenching adjustment thereaer.Tey thus come top in our ranking or thestrongest swing in labour market dynamics,with Estoniaas No. 1 and Irelandas No. 2.Tey are ollowed by Finland(No. 3), Malta(No. 4)and Luxembourg(No. 5), that is,by countries that also t into the small andopen category.


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Overall, our results stand out:

1. Wage pressures are converging rapidlywithin the eurozone. welve o the 17 euromembers have reversed positions relative tothe 2008 eurozone average, either movingrom below- to above-average increases inreal unit labour costs or vice versa.

2. Whereas wage moderation has ended insome core countries such as Germany andAustria, it has taken hold in much o theeuro periphery.

15. As labour markets tend to react with some lag to the real economy, we use 2009 instead o 2008 as the base year or thisparticular adjustment indicator.

Those countries most in need o reining in theirexcessive decits have made serious progress, withGreece well ahead o Portugal and Spain.

0 5% 10% 15%-5%-10%

Estonia

Luxembourg

Malta

Finland

Ireland

Greece

Spain

Slovakia

Netherlands

Portugal

Belgium

Euro17

Austria

Germany

Italy

Cyprus

France

Slovenia

2000-2009

2009-2011

3. Te small, open economies which saw themost pronounced increases in real unitlabour costs in the years 2000-2009,15oen on the back o a credit-uelled realestate boom, also saw the biggest relativeand absolute decline in real unit labourcosts thereaer.

4. Among the less open economies whichdid not have a private-sector credit bubblebeorehand, Greece stands out as the countrywith the most pronounced decline in realunit labour costs.

Chart 4: Real Unit Labour Cost Adjustment (in Percent)Cumulative deviation o change in real unit labour cost rom eurozone average; 2000-2009 vs. 2009-2011



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16. European Council, op. cit..

Te rankings in the overall health check canhelp to explain why some countries have allenvictim to the current sovereign debt crisiswhile others have not. But that is not our soleobjective. We also want to abstract rom thespecic peculiarities o the current situationand ocus on the longer-term health o theeconomies we examine in this policy brie.

o assess both the overall health o euromembers and their potential vulnerabilityto serious nancial shocks, we look at ourunderlying sub-indicators: 1) long-term growthpotential, 2) competitiveness (measured here asperormance on exports and improvements inrelative unit-labour costs), 3) scal sustainability,and 4) undamental resilience to nancialshocks. Countries are measured on each o theseour sub-indicators, and assigned a score andrank. Ten, the our sub-indicators are broughttogether in one overall score and the countriesare each given a ranking relative to othereurozone members.

Te our pillars o our analysis largely overlapwith the our goals o the Euro Plus Pact: 1) tooster employment, 2) oster competitiveness, 3)contribute urther to the sustainability o publicnances and 4) reinorce nancial stability.16Te guiding ideas o the Pact make undamentalsense. More importantly, they are not just loyideas. In their own somewhat haphazard ashion,many eurozone members are already makinggreat strides towards putting them into practice.

Estonia(No. 1) and Luxembourg(No. 2) bothcome out on top o the Overall Health Indicator

ranking. Both benet rom exceptionallyprudent scal policy. For Estonia, the score alsoreects its very supply-riendly economic policyand the resulting rapid turnaround in net exportsand wage costs aer the 2007-2008 crisis.Germanyand the Netherlands, meanwhile, tieor the No. 3 spot. Both economies are extremelycompetitive. Te Dutch have a slight edge overGermany on long-term growth potential (wherethe Netherlands ranks No. 1, while Germanyis No. 3), partly because the Dutch have higherertility rates and a better demographic outlook.But Germany (at No. 5 by this measure) looksmore resilient to nancial shocks than itsneighbour on the shores o the North Sea(at No. 8 in this category).

Slovenia(No. 5), Slovakia(No. 6) and Finland(No. 7) also show up prominently on the list ohealthy economies; these countries have each,in their own way, done a good job o preparingor uture challenges and managing todayschallenges eectively.Austria(No. 8) andBelgium (No. 9) come out in the middle o theranking, with scores which are modestly aboveaverage. Austria is the slightly more dynamicand resilient o the pair (with a No. 6 rankingon the sub-indicator or long-term growth), butBelgium excels with a good rating on the sub-indicator or competitiveness, where it ranksNo. 4 amongst eurozone economies, reectingits export prowess.

Interestingly, while Ireland(No. 10) and Spain(No. 12) gure prominently in the currentsovereign debt crisis, they earn mediocrebut not dismal scores in the Overall Health

II. Overall Health Indicator

The guiding ideas o the Euro Plus Pact makeundamental sense. Many countries are alreadymaking strides towards putting them into practice.


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Indicator. Ireland looks exceptionally strong oncompetitiveness, where it ranks No. 3, whereasSpain benets rom its comparatively low level opublic debt (where it ranks No. 6). For Ireland,the score also reects some o the recent externaladjustment which has been early and prooundenough to inuence not just our short-termadjustment ranking but also our long-termhealth check.

But the news in the Overall Health Indicatormay be the relatively poor perormance oFrance (No. 13), which ares only marginallybetter than Italy(No. 14). It is worth notingthat both countries are well below Ireland(whose high ranking on competitiveness helpsgive it a No. 10 ranking) and Spain (whoserelatively low public debt ratio gives it an overallNo. 12 ranking). For France, the weakest spotsare the inward-looking nature o its economyand its excessive scal decits. Italy is beingheld down by its dismal outlook or long-term

growth, reecting partly the low birth rate butmostly the decline in gross value added permember o the labour orce over the eight yearsto 2010. Put dierently, low productivity growthrooted in excessive regulations is the Achillesheel o the Italian economy.

France also takes the Leviathan award or themost bloated share o government spending inGDP (53.7%) o all eurozone members. I Francehad a share o government spending in GDPterms in line with the eurozone average, its scorein the Overall Health Indicator would move to4.8, up rom 4.5, and thus well above the resultsor Italy and Spain.

Greece (No. 17) denes the lower end o therange with weak scores on all major counts.Portugal (No. 15) and Cyprus (No. 16) areonly modestly ahead o Greece. Portugal suersparticularly rom a low ranking or its growthpotential.

II.1 Long-Term Growth Potential

Growth does not cure all economic and nancialills. But it helps. o gauge the overall health oeurozone members and assess how vulnerablethey are to uture nancial crises, we look at ourmajor actors that shape the long-term ability oan economy to expand: 1) recent trend growth,2) human capital, 3) the labour market, and4) the propensity to save rather than consume.Once we have measured and analysed countriesbased on their perormance in each o theseour sub-sub-indicators, we award theman overall score and ranking or Long-ermGrowth Potential.

Some core eurozone economies comeout particularly well. Helped by a vibrantlabour market, a low propensity to consumeand good scores on all other counts, theNetherlands comes No. 1 in the overallranking or growth potential, ollowed byLuxembourg(No. 2) and Germany(No. 3).

Meanwhile, the worst rankings or long-term growth potential go to some o themost amous debt crisis countries on theeurozone periphery, namely Spain (No. 15),Italy(No. 16) and Portugal (No. 17).In the years 2002 to 2010, all three countries

France takes the Leviathan award or the mostbloated share o government spending in GDP.


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saw a comparatively strong increase in theirpropensity to consume while generating verylittle trend growth in their non-constructiongross value added.

Greece (No. 13) and Cyprus (No. 14) alsoreceive airly low scores or their growthpotential, with Greece also being heldback by its high consumption and lowproductivity.

Te dynamic euro newcomers rom east-central Europe Slovenia(No. 4), Estonia(No. 7) and Slovakia(No. 9) all scoreairly well.

Te below-average ranking or France(No. 11) is closer to that o Greece (No. 13)than o Germany (No. 3). France scoresparticularly badly on its recent growthperormance. Although France enjoys theadvantage o a high birth rate, the countrydoes ar less than Germany to utilise itshuman potential.

Tere is a ip side to many o the scores.Low rankings or many countries in some keyaspects also demonstrate the potential whichthese countries could unleash by targetedreorms, or instance by labour market andeducation reorms in France and Spain.

Wage pressures are converging rapidly withinthe eurozone.

Table 6: Growth Potential Ranking

Rank Country Total score Recent growth Human Capital Employment Consumption

1 Netherlands 7,5 7,5 6,9 8,0 7,5

2 Luxembourg 7,1 7,2 4,3 6,8 10,0

3 Germany 6,6 7,5 4,2 8,1 6,8

4 Slovenia 6,2 7,7 4,0 6,6 6,6

5 Finland 6,2 6,7 8,0 5,9 4,0

6 Austria 6,1 6,4 2,6 8,3 7,2

7 Estonia 5,6 6,9 4,6 2,4 8,4

8 Belgium 5,5 4,1 6,7 5,1 6,29 Slovakia 5,2 9,4 2,4 2,4 6,8

10 Ireland 4,7 5,3 6,1 2,1 5,2

11 France 4,7 3,3 6,0 5,0 4,3

12 Malta 4,2 n.a. 2,5 5,3 4,7

13 Greece 4,0 6,4 3,1 3,5 2,9

14 Cyprus 3,8 2,1 2,9 7,0 3,2

15 Spain 3,4 2,3 3,8 2,1 5,2

16 Italy 3,2 0,5 3,8 3,9 4,5

17 Portugal 3,2 2,2 4,4 3,9 2,1

Euro17 5,0 4,5 4,6 5,4 5,5


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II.1.a. Recent Trend Growth

Te obvious starting point to analyse the long-term growth potential o a country is thatcountrys actual recent growth perormance.But this data, too, can carry many distortions, aswe saw in the years to 2008 when much growthwas based on boom-bust actors and distortedasset prices. o correct in particular or boom-bust cycles in real estate a common problemin all pre-2008 economic data we lookat the trend in gross value added (GVA)

17. Gross value added (GVA) is economic output at market prices minus intermediate consumption at purchaser prices. For thetrend growth analysis, we use real GVA excluding construction.To separate the mere business cycle rom the underlyingtrend, we compare 2010 to 2002, both roughly one year ater a cyclical trough.

Mature economies with high levels o productivitytypically nd it more dicult to grow ast thanless mature economies, which are exploiting theirpotential to catch up.

1% 2% 3% 4%-1% 0 5%

Malta

Slovakia

Estonia

Slovenia

Greece

Germany

Netherlands

Finland

Austria

Luxembourg

Euro17

Ireland

Belgium

Spain

Cyprus

France

Italy

Portugal

GVA actual

GVA expected

N/A

outside the construction sector.17 We alsoadjust the data or increases in the laboursupply. By relating a measure o actual outputto a measure o potential input, we calculateda variant o productivity. But this variant takesthe available pool o labour (the potential) ratherthan actual use o labour as its base. We will dealwith the way the countries actually utilise theirhuman capital in the separate employment pillaro our analysis.

Chart 5: Trend Growth 2002-2010 (in Percent)Compound annual growth in non-construction gross value added 2002-2010 per member o the labour orce,expected = model estimate or this trend rise based on starting level



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For the overall ranking o recent trend growth, wecombine two sub-indices, namely 1) the actualaverage annual increase in GVA as dened above,and 2) the deviation o that growth rom ourmodel estimate o how ast a eurozone membershould expand rom the initial starting level. Simplycomparing growth rates can be misleading. Matureeconomies with high levels o productivity typicallynd it more difcult to grow ast than less matureeconomies, which are exploiting their potential tocatch up. As economies mature, they naturally losesome o their initial youthul dynamism.

Unsurprisingly, the dynamic euro newcomers romeast-central Europe Slovakia(4.4%), Slovenia(2.5%) and Estonia(2.9%) enjoyed the strongestaverage annual increase in their non-constructiongross value added over this period, ollowed withsome distance by Greece (1.9%), as shown in theindividual country reports that begin on page 56.

Among the core European countries, Germany(1.6%)and the Netherlands (1.6%) doparticularly well, whereas France (0.4%) doesnot. In act, Frances trend growth rate is slightlybelow the rate in Spain (0.6%), Portugal (0.8%)and Cyprus (0.5%). At the bottom o the league,Italy(-0.2%) is the only country in which non-construction gross value added per potentialworker declined in the eight years to 2010.18

Comparing the actual gain in non-constructionGVA per labour orce to the model estimate basedon the starting level, we get a somewhat dierentranking: Slovakia still tops the list. But Germany,the Netherlands and Luxembourg move up in the

rankings. Relative to their elevated starting level,they managed to expand their economies ratherwell in the eight years to 2010.

Combining actual growth and the deviation romour model estimate into a single ranking or recenttrend growth, Slovakia (No. 1), Slovenia (No. 2)and Estonia (No. 6) still do very well. But Germany(No. 3) and the Netherlands (No. 4) attain scoresonly modestly behind the youthul star perormers.

In the overall ranking, France (No. 12), Spain(No. 13), Portugal (No. 14), Cyprus (No. 15) andItaly (No. 16) all expanded signicantly less thanthey should have relative to their starting level.Tese countries are ar rom realising their potential.

18. We suspect that the Italian data on real gross value added may slightly understate the countrys actual economic perormance. Italiandata show an unusual gap between the gross value added defator (rising much more rapidly in Italy than in the eurozone as a whole)

and consumer prices (rising only slightly aster than eurozone average). One possible explanation is that part o the rapid improvementin product quality which Italy delivered as it moved upmarket or many goods in the ace o erce Chinese competition is wronglycaptured in Italian statistics as infation (higher prices or shoes and handbags, or example) rather than real output (better qualityo shoes and handbags). An upward revision in some Italian current account and GDP statistics, based on a dierent calculationo defators, may partly address our concerns about Italian statistics. But the new data still have to be validated by Eurostat.

The more the domestically-born population is setto contract, the more important it is or a societyto attract and integrate immigrants.

Table 7: Recent Trend Growth

Rank Country Score

1 Slovakia 9,4

2 Slovenia 7,7

3 Germany 7,5

4 Netherlands 7,5

5 Luxembourg 7,2

6 Estonia 6,9

7 Finland 6,7

8 Greece 6,4

9 Austria 6,4

10 Ireland 5,3- Euro17 4,5

11 Belgium 4,1

12 France 3,3

13 Spain 2,3

14 Portugal 2,2

15 Cyprus 2,1

16 Italy 0,5

n.a. Malta n.a.


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o assess the human potential in the countriessurveyed, we compare three very dierent sub-indicators: 1) the ertility rate as a proxy or theuture trend in the domestic labour orce, 2)the ability to integrate immigrants, and 3)the quality o the countrys education system.

Regarding ertility, the overall trends in theeurozone are well known: women in Franceand Ireland have the most babies, with the

50 60 70 8030 40 90

Portugal

Finland

Netherlands

Belgium

Spain

Italy

Luxembourg

Euro17

Germany

France

Greece

Ireland

Estonia

Austria

Malta

Slovakia

Cyprus

Slovenia

ertility rate close to the 2.1 threshold neededto ully replace the current generation by anew generation over time. Portugal, Germany,Austria, Spain, Slovakia and Italy have the lowestertility rates, reaching only around two-thirdso the replacement ratio.

Regarding integrating immigrants, we believethat the more the domestically-born populationis set to contract, the more important it is or

Being used to monetary discipline may be helpul orimproving overall employment perormance withinthe strictures o monetary union.

II.1.b. Human Capital

Chart 6: Human Capital Integration o ImmigrantsMigration Integration Policy Index (MIPEX)

Source: MIPEX


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a society to attract and integrate immigrants.As a proxy or how well countries do this, wetake the Migration Integration Policy Index(MIPEX).19 On access to education, theinternationally comparable PISA scores can serveas a rough proxy or the quality o the educationsystem.20 Te PISA results reveal a rough North-South pattern. Whereas Finland comes topand the Netherlands and Estonia also do well,Italy, Spain and Greece have among the lowestscores. In core Europe, Germany and Belgiumcome in well ahead o France. O course, theNorth-South pattern is not perect, with a verylow ranking or Luxembourg being the mainexception to the rule.

We combined these three aspects intoone aggregate indicator or human capital.Te results show no clear pattern. Finlandcomesin at No. 1, topping the list with a comparativelyhigh birth rate, a good record o integratingimmigrants and an excellent PISA score.By contrast, Greece (No. 13), Cyprus (No. 14),

Austria(No. 15), Malta(No. 16) and Slovakia(No. 17) do badly.

For human capital, the overall result or France(No. 5) is above the eurozone average andabove that or Germany(No. 9) because othe much higher ertility rate o French women.Tis is despite a relatively low French ranking or

the integration o immigrants and a mediocrePISA score. Tis illustrates a key point: Francehas a lot o potential that needs to be unleashed.I France could get its act together, educatingits pupils and integrating its immigrants betterthan it does so ar, its high ertility rate couldenable it to move up considerably in the overallgrowth ranking.

19. The MIPEX project is led by the British Council and the Migration Policy Group. The MIPEX index evaluates 148 indicators

rom seven dierent areas: labour market mobility, amily reunion or third-country nationals, education, politicalparticipation, long-term residence, ease o being accepted as a national and anti-discrimination measures. For urtherdetails, see http://www.mipex.eu.

20. Graduation rates or the most recent age cohort are only available or 10 out o 17 eurozone members, makingcontemporary comparison dicult.

Table 8: Human Capital

Rank Country Score

1 Finland 8,0

2 Netherlands 6,9

3 Belgium 6,7

4 Ireland 6,1

5 France 6,06 Estonia 4,6

- Euro17 4,6

7 Portugal 4,4

8 Luxembourg 4,3

9 Germany 4,2

10 Slovenia 4,0

11 Italy 3,8

12 Spain 3,8

13 Greece 3,1

14 Cyprus 2,9

15 Austria 2,6

16 Malta 2,5

17 Slovakia 2,4

I France could get its act together, educating itspupils and integrating its immigrants better, its highertility rate could enable it to move up considerablyin the overall growth ranking.


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How well does a country use its labour resources?o calculate this, we aggregate results or theollowing our sub-sub-indicators into an overallranking or employment: 1) the employmentrate in 2010, 2) the rise in the employment ratesince 2002, 3) youth unemployment, and 4)long-term unemployment. We combine the ourseparate aspects o the employment perormanceinto an overall ranking.

Parts o core Europe seem to have ound the keyto unlock their human potential:Austria

60% 70%50% 80%

Netherlands

Austria

Germany

Cyprus

Finland

Slovenia

Portugal

Luxembourg

Euro17

France

Belgium

Estonia

Greece

Slovakia

Spain

Italy

Malta

Ireland

(No. 1), Germany(No. 2) and the Netherlands(No. 3) lead the eld by a wide margin.Interestingly, these are also among the countrieswith the most rmly rooted tradition oconservative monetary policy (Austria and theNetherlands had tied their erstwhile nationalcurrencies rmly to the Deutschmark at a veryearly stage). Te lesson could be that beingused to monetary discipline may be helpul atimproving overall employment perormancewithin the strictures o monetary union.But institutional actors such as the system

Youth and long-term unemployment also have thepotential to turn into major social problems over time.

Chart 7: Employment Rates (in Percent)Average employment rate 2002-2010

Source: Eurostat

II.1.c. Employment


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o vocational training in Austria and Germany aswell as the ease o nding temporary or part-timeemployment in the Netherlands probably playa major role as well.

Ireland(No. 17) denes the bottom o the list.It comes out behind Spain (No. 16) despitehaving an admirably exible labour market.Te bursting o a big bubble in the labour-intensive construction sector le a major rise instructural unemployment in its wake that wouldbe difcult to digest even or a highly exibleeconomy. Low-skilled construction workersmay not have the skill set to shi to service jobsovernight. Unsurprisingly, Spains labour marketis that countrys weakest spot.

Italy(No. 12) has an overall employment ratewell below the eurozone average and suers roma high rate o youth unemployment. Similarly,two o the smaller and comparatively poor euronewcomers rom east o the ormer Iron Curtain Estonia(No. 14) and Slovakia(No. 15) alsorank poorly. For both o these economies, whichare among the most dynamic o all on most otherindicators, raising the overall employment rateand cutting long-term and youth unemploymentmay well be the biggest challenges as theycontinue to catch up to the richer euro membersrom the ormer Western Europe. France (No.10) achieves a mediocre ranking, held back by itscomparatively high rate o youth unemployment.

On the most important sub-components,namely the employment rate in the 2010 cycleand the increase in the employment rate since2002, two core European countries stand out:

Te Netherlands had by ar the highestemployment rate (74.7%) in the eurozone(though it ranks No. 3 in the overall

indicator due to the lack o any urtherincrease in this rate).

Due to its post-2003 reorms, Germanyhas achieved the most impressive rise in itsemployment rate, rising to 71.1% in 2010,up rom 65.4% in 2002.

Put dierently, the Netherlands and Germanydene the benchmark or best practice andmost improved countries, respectively, or theoverall employment situation in the eurozone.

At the same time, Ireland (60.0%), Portugal(65.6%) and Estonia (61.0%) are the onlycountries within the eurozone with a loweremployment rate in 2010 than in 2002.For them, the weak 2010 data relativeto 2002 probably reect at least partlythe current adjustment crisis rather thanan underlying trend.

Table 9: Employment

Rank Country Score

1 Austria 8,3

2 Germany 8,1

3 Netherlands 8,0

4 Cyprus 7,0

5 Luxembourg 6,86 Slovenia 6,6

7 Finland 5,9

- Euro17 5,4

8 Malta 5,3

9 Belgium 5,1

10 France 5,0

11 Portugal 3,9

12 Italy 3,9

13 Greece 3,5

14 Estonia 2,4

15 Slovakia 2,4

16 Spain 2,1

17 Ireland 2,1

Over the eight years rom 2002 to 2010, real unitlabour costs declined noticeably in Germany andSpain (as well as in Luxemburg, Malta and Cyprus).


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wo other measures also shed light on howwell a country is using its human capital.Young people who are unemployed are denied thechance to hone their newly-learned skills on thejob, and the long-term unemployed are at risk olosing their proessional skills.21 Youth and long-term unemployment also have the potentialto turn into major social problems over time.

Te unemployment rate among young peopleis particularly high in some o the eurozonecrisis economies, namely Spain, Greece andEstonia. All three are reeling under the currentadjustment crisis (or the relatively recent crisis inthe case o Estonia). Interestingly, Slovakia alsoares badly on this count. Some core countriessuch as the Netherlands, Austria and Germanyare best at oering their young generation a job.

Te results are similar or long-termunemployment, with Spain, Slovakia, Irelandand Estonia scoring badly whereas Austria andthe Netherlands lead the eurozone rankings.Germany also has a airly low rate o long-term unemployment. But Germany has beenmuch less successul at bringing its long-termunemployed back into a job than it hast beenat keeping youth unemployment down.

In the end, no other indicator shows a clearerri between the core and the periphery o theeurozone, with excellent or at least good readingsor many core countries and weak readings ormost peripheral countries almost regardless otheir exposure to the current debt turmoil ortheir longer-term growth trend.

21. Paul Hoheinz, Why Skills are Key to Europes Future (Brussels: The Lisbon Council, 2009).

II.1.d. Total Consumption

We round o our analysis o long-term growthpotential with a look at total nal consumptionand output. Te smaller the share o totalconsumption in GDP, the more a countrysaves, allowing it to invest its savings eitherat home or abroad. We aggregate householdand government consumption and examine boththe average share o total nal consumption inGDP over the 2002-2010 cycle and the changein this share over this period. We combine theseparate scores or the average level and thechange in the consumption score into onejoint ranking, and rank the countries rombest to worst perorming.

Portugal (No. 17 on the consumptioncriterion) and Greece (No. 16) had a very highconsumption ratio and expanded that ratiomore than other countries over that period,sending these two countries to the bottomo the ranking on this sub-indicator. Cyprus(No. 15)looks little better. It had the highestaverage consumption ratio. But this high startinglevel le it little room to raise consumptioneven urther, so its overall ranking is slightly lessdismal than that or Portugal and Greece.

Luxembourg(No. 1) gets by ar the best score,with a low consumption ratio and a signicant

The German rank, or example, could still besignicantly better i the country were to open upits service sector much more thoroughly.


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-0.9 0.6-1.2 -0.6 -0.3 0 0.3 0.9 1.2

Finland

Ireland

Portugal

CyprusSpain

Italy

France

Euro17

Belgium

Slovenia

Greece

Austria

Netherlands

Germany

Slovakia

Estonia

Luxembourg

Malta

Table 10: Consumption Rate

Rank Country Score

1 Luxembourg 10,0

2 Estonia 8,4

3 Netherlands 7,5

4 Austria 7,2

5 Slovakia 6,8

6 Germany 6,8

7 Slovenia 6,6

8 Belgium 6,2

- Euro17 5,5

9 Ireland 5,2

10 Spain 5,2

11 Malta 4,7

12 Italy 4,5

13 France 4,3

14 Finland 4,0

15 Cyprus 3,2

16 Greece 2,917 Portugal 2,1

Italy, Spain and Greece are among the economies witha signicant drop in the share o exports in GDP overthe 2002-2010 cycle.

Chart 8: Total Consumption Change in Share in GDP (as a Percentage o GDP)Annual average change in share o total (private and public) consumption in nominal GDP 2002-2010



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II.2 Competitiveness

Competitiveness is an elusive concept.Te ultimate proo whether a company cancompete is whether it can successully sell itswares to customers who have a choice. Te waresmay or may not be expensive, the company mayor may not pay premium wages: what countsis whether customers value its products enoughto pay the requested price or them.

We analyse the competitiveness o a country in asimilar way: does the country nd customers orits exports? Whether or not wages or unit labourcosts are high plays a role. But only a secondaryrole. Wages and other actors inuence the pricethat needs to be charged. Many other aspects,ranging rom the perceived quality o a productto the perceived value o a brand, also determinewhether the good or the service nds a willingbuyer. In our analysis o competitiveness,we thus ocus on two measures o export success:1) on the share o exports in a countrys GDPand 2) on the rise o that share over time.Later, we add two other aspects, labour costsrelative to other eurozone members and the level

o product and service market regulation or an overall assessment.

Surprise, surprise: the Netherlands (No. 1) andGermany(No. 2) get top honours and Greece(No. 16) and Cyprus (No. 17) come bottom othe competitiveness ranking.

Beyond re-stating the obvious, some details inthis calculation are interesting: Te Germanrank, or example, could still be signicantlybetter i the country were to open up its servicesector much more thoroughly. Some urtherlabour market reorm would also help. On allother counts, Germany looks very good indeed.

Contrary to a widespread assertion, the Achillesheel o Greece is not the longer-term trend inits real unit labour costs. While nominal unitlabour costs rose aster than in most other euromembers, Greek real unit labour costs declinedmodestly between 2002 and 2010. Almost allother aspects o competitiveness (i.e., productmarket regulation) are worse problems or

decline in that ratio over the 2002 to 2010period. Estonia(No. 2) comes second with acomparatively modest and declining propensityto consume.

Amongst the major core European economies,the Netherlands (No. 3) andAustria(No. 4)stand out due to their low consumption ratios.Although Germany(No. 6) reduced itsconsumption ratio marginally rom 2002to 2010, it comes well behind Austria and theNetherlands on this sub-indicator because o its

somewhat higher average propensity to consume.Italy(No. 12) and France (No. 13) get airlysimilar results somewhat below the eurozoneaverage. Both recorded an above-average increasein their consumption ratio over time.

Te scores or Ireland(No. 9) and Spain(No. 10) are slightly below the eurozone average.In both cases, a comparatively low averageconsumption ratio osets the drag rom anoticeable increase in this ratio over the 2002to 2010 period.

The ultimate proo whether a company can competeis whether it can successully sell its wares tocustomers who have a choice.


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Greece than pure labour costs. Te conclusionis clear: Greece does not need to leave the euroto regain competitiveness with a much-devaluednew national currency. Instead, it needs toreorm itsel thoroughly.

Te results or Ireland(No. 3) and Slovakia(No. 5) are also quite encouraging, with Irelandbeneting rom a strong export perormance anda very low level o product market regulation.France (No. 15) scores badly on almost allcounts except a below-average level o product-market regulation. For an AAA-rated country,

the overall ranking o No. 15 out o 17 orcompetitiveness looks particularly dismal.

It is little consolation that Italy(No. 13) is onlymodestly more competitive than France. As inthe case o France, the decline in its propensityto export shows up as the major single problemor Italy. Spain (No. 14) and Portugal (No. 11)score less badly than France on competitiveness.Te ranking or Spain and Portugal couldimprove signicantly i they would reducetheir exceptionally high levels o employmentprotection.

Table 11: Competitiveness Ranking

Rank Country Total Score Export Ratio Export Rise Labour Regulation1 Netherlands 8,2 8,0 9,7 6,2 8,8

2 Germany 7,9 8,3 10,0 7,8 5,5

3 Ireland 7,0 6,4 7,4 4,7 9,4

4 Belgium 6,7 8,8 5,1 6,1 6,8

5 Slovakia 6,7 9,7 6,1 5,2 5,7

6 Slovenia 6,7 10,0 8,9 2,2 5,5

7 Estonia 6,4 9,6 7,0 1,7 7,2

8 Luxembourg 6,4 8,0 8,6 4,9 4,1

9 Malta 6,4 6,2 5,8 7,0 n.a.

10 Austria 5,3 3,7 6,5 6,3 4,7

11 Portugal 4,8 2,2 6,6 4,2 6,1

12 Finland 4,5 1,4 3,8 4,1 8,6

13 Italy 4,1 2,6 5,1 4,3 4,3

14 Spain 3,8 2,5 2,7 4,6 5,3

15 France 3,7 2,1 2,0 3,9 7,0

16 Greece 2,7 0,1 4,6 4,2 1,7

17 Cyprus 2,4 1,3 0,0 5,9 n.a.

Euro17 6,2 5,9 7,3 5,6 5,9

Greece does not need to leave the euro to regaincompetitiveness with a much-devalued new currency.Instead, it needs to reorm itsel thoroughly.


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Te ultimate proo o a pudding is in the eating.Whether or not a country can successullycompete should show up most and oremostin its export perormance. However, simplycomparing the ratios o export in GDP would begrossly misleading. Companies producing theirgoods in small countries typically sell a biggershare o their output abroad than companiesresiding in bigger countries with a large homemarket. In a similar vein, rich countries tend tobe more ully integrated into the internationaldivision o labour than poor countries.

We thereore adjust the actual export ratiosaccordingly. We rst estimate or all eurozonemembers the impact o their overall GDP (asa proxy or the size o their domestic market)and their per capita GDP (as a proxy or howrich the countries are) on their ratio o exportsin nominal GDP. We then compare the modelestimates to the actual export ratios. Accordingto this calculation. Slovakia and Germanyexport much more, and Greece and Cyprusexport much less than they should. Italy, France,Portugal and Spain also have export ratios belowthe norm.

In addition, we look at the rise in the actualexport share rom 2002 to 2010 relative tothe 2002 starting level. Although Germanyhad a comparatively high starting level, it alsomanaged to raise its export share most rapidlyon this relative basis. Italy, Spain and Greeceare among the economies with a signicantdrop in the share o exports in GDP over the2002-2010 cycle.

Te overall ranking or export prowess,combining both the adjusted share o exports

in GDP and the rise o this share over time, yieldsthe ollowing, more or less expected, results:

Germany(No. 2) does extremely well, althoughtrailing marginally behind small Slovenia(No. 1). Greece (No.15)comes in close tothe bottom, although Cyprus (No. 17) lookseven worse. Although they look ar less dismalthan the two worst perormers, Italy(No. 12)and Spain (No. 13) also let their export ratioslip signicantly in the eight years to 2010.For France (No. 16), its inward-orientationwith a low and declining export ratio is a majorhandicap in the overall ranking.

Table 12: Export Prowess

Rank Country Score

1 Slovenia 9,5

2 Germany 9,2

3 Netherlands 8,8

4 Estonia 8,3

5 Luxembourg 8,3

6 Slovakia 7,9

7 Belgium 7,0

8 Ireland 6,9

- Euro17 6,6

9 Malta 6,0

10 Austria 5,1

11 Portugal 4,4

12 Italy 3,9

13 Spain 2,6

14 Finland 2,6

15 Greece 2,4

16 France 2,1

17 Cyprus 0,7

Note: This table combines the separate rankings or exportratio and the rise in the export ratio or an indicator o overallexport prowess

According to OECD data, Luxembourg grants itsemployees the highest degree o protection, butwealthy Luxembourg apparently can aord it dueto its many other inherent advantages.

II.2.a. Export Perormance


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-2% 3%-3% -1% 0 1% 2% 4%

Germany

Netherlands

Slovenia

Luxembourg

Ireland

Euro17

Estonia

Portugal

Austria

Slovakia

Malta

Italy

Greece

Finland

SpainFrance

Cyprus

Belgium

II.2.b. Labour Costs

Unit labour costs are a very imperect gaugeo competitiveness. But they do matter.Over the eight years rom 2002 to 2010, realunit labour costs declined noticeably in Germanyand Spain (as well as in Luxemburg, Malta andCyprus). For Germany and Spain, the reasonsor the decrease in costs pressures were verydierent: whereas German companies benetedrom genuine wage moderation, allowing themto raise employment signicantly, the Spanishdata are distorted by the post-2007 bust inthe labour-intensive construction industry.With less productive construction workers laido in droves, the average productivity o theworkers still employed rose, hence reducingaverage unit labour costs.

Table 13: Labour Cost

Rank Country Score

1 Germany 7,8

2 Malta 7,0

3 Austria 6,34 Netherlands 6,2

5 Belgium 6,1

6 Cyprus 5,9

- Euro17 5,6

7 Slovakia 5,2

8 Luxembourg 4,9

9 Ireland 4,7

10 Spain 4,6

11 Italy 4,3

12 Greece 4,2

13 Portugal 4,2

14 Finland 4,1

15 France 3,9

16 Slovenia 2,2

17 Estonia 1,7

To acilitate structural change in an economy, would-be entrepreneurs must be able to establish and grownew companies easily.

Chart 9: Rise in Exports (in Percent)Annual average rise in export ratio 2002-2010, relative to starting level in 2002



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-2% -1% 0% 1% 2% 3% 4% 5% 6% 7%

Ireland

Estonia

Finland

Slovenia

ItalySlovakia

France

Netherlands

Austria

Euro17

Portugal

Greece

Malta

Cyprus

Spain

Germany

Luxembourg

Belgium

RULC

NULC

In a currency union with irrevocably xedexchange rates, nominal unit labour costs arearguably a better gauge o competitivenessthan real unit labour costs. Looking at nominalrather than real unit labour costs, the overallpicture changes only modestly: Germany stillhas the most subdued and Estonia the strongestincrease in labour costs. But or some o theperipheral European economies, the dierencematters. Because they had signicantly moreination than most other euro members, Spainand Greece also had above-average increasesin nominal unit labour costs despite modestdeclines in real unit labour costs.

Unit labour costs are only one labour-relatedaspect that can shape the decision o companieswhere to invest and create jobs. Employmentprotection, including the implicit costs o such

regulations and the legal uncertainty createdby the regulatory regime, also play a majorrole. o capture this eect, we add the OECDEmployment Protection Strictness Indicatorto our analysis o labour costs.22

Comparing employment protection, Irelandand Slovakia stand out with exceptionally liberalregulatory regimes whereas Portugal, Franceand Spain make it particularly difcult or theircompanies to use labour exibly, with Greecealso doing badly on this count. According to theunderlying OECD data, Luxembourg grants itsemployees the highest degree o protection, butwealthy Luxembourg apparently can aord it dueto its many other inherent advantages.

Combining the results or the trend in real unitlabour costs in nominal unit labour costs and

22. OECD, Calculating Summary Indicators of Employment Protection Strictness (Paris: OECD, 2009).

In a currency union with irrevocably xed exchangerates, nominal unit labour costs are arguably a bettergauge o competitiveness than real unit labour costs.

Chart 10: Change in Labour Cost (in Percent)Compound annual average rise in real unit labour cost 2002-2010Compound annual average rise in nominal unit labour cost 2002-2010



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the strictness o employment protection into oneindicator yields several interesting insights: Majorcore countries Germany(No. 1),Austria(No. 3), Netherlands (No. 4) and Belgium(No. 5), as well as non-core Malta(No. 2) andSlovakia(No. 7), apparently oer employersattractive conditions to create jobs. Portugal(No. 13) and France (No. 15) meanwhile, scorebadly on this count due to their exceptionallystrict employment protection regime. Te Frenchscore is below those or Spain (No. 10), Italy(No. 11) and Greece (No. 12).

Due to strong rises in real and nominal unitlabour costs, Slovenia(No. 16)and Estonia(No. 17) get the worst scores in our labour costranking. But as economies in the process ocatching up which oen goes along withmajor improvements in product quality that arenot accurately captured in the output statisticsand wit

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Euro Plus Monitor 2011

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