Financial Times
May 20, 2012
If you want to know what will drive the eurozone to destruction, my advice would be to follow the money, and ignore the real economy.
I am exaggerating, of course, but only a little.
The distortions in competitiveness between eurozone member states are important, but in the short run, I would ignore them for three reasons.
First, the competitiveness gap is not as big as some of the estimates suggest. I am especially wary of analysis that shows a divergence of unit labour costs, or other national price indices, since 1999 when the euro was introduced. Germany entered the eurozone with an overvalued exchange rate, which has exaggerated the extent of the subsequent adjustment made by Germany compared with others.
Second, the imbalances between surplus and deficit countries have got smaller, and will continue to do so, albeit very slowly. While I, too, believe that the European Central Bank’s inflation target is too low, further reductions in imbalances are possible as long as Germany produces above average inflation.
Third, a lack of competitiveness may imply misery, but does not necessarily trigger a break-up.
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