Eurozone Watch

Last Friday, Ulrich Fritsche and I presented the results from our analysis of unit labour costs in EMU compared to regional unit labour cost developments at a workshop in Cambridge (see paper here). When we remarked that Portugal had lost roughly 17 percent competitiveness between the start of EMU and 2006, more than has been ever observed in any German Land or US state within any 8-year-period, one discussant remarked that Portugal has actually improved competitiveness in 2007 and is set to do so again in 2008. So, is Portugal actually turning the corner after years in the doldrum?

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Today, GDP figures for Germany, France and the Euro-area as a whole were published. While the figures by itself might have been distorted by some one-off factors, the underlying divergence in the data is rather frightening. What has for quite a while been one of the top issues on Eurozone Watch is increasingly taken up by bank analysts: The growind divergence within EMU.

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Over the past week, the German economy has shown first real signs of an economic slow-down. Data from the labour market has been much less upbeat than before. Yesterday, also manufacturing orders took a hit, pointing to a further growth moderation starting in the second quarter of 2008. The strong euro and the investment backlash from the tax reform enacted on January 1 of this year are finally felt in the economy.

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Next Wednesday, May 7th, the European Commission will put forward a long-awaited report on the Eurozone. A few months ahead of the Euro's 10th anniversary, this report is unlikely to trigger a debate the EMU should go through, given recent developments, such as the increasingly observed cyclical divergence and prolonged business cycles that EMU is experiencing, and the economic tensions that are coming up e.g. for Spain. There is a (very) slight chance that the report is somewhat more ambitious regarding external issues, such as the international representation of the Euro, but it is again improbable that it will tackle the issue of what to do with the external value of the euro (i.e. how to manage relationships with the EMU’s major economic partners, the US, China, the UK, …). But let’s concentrate on the question what there is to expect for the internal aspects of EMU governance for the moment.

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