The False Economist

Sunday, March 13, 2011

Daniel Gros: Flawed Economics of the Competitiveness Pact

The Director of the Centre for European Policy (CEPS), Daniel Gros, has written a short article examining the logic behind the so-called Competitiveness Pact, a joint proposal from France and Germany to improve the Euro Area's competitiveness. The Pact led to a number of alternative proposals being offered, most notably one by the Presidents of the Commission and European Council.

The Pact will be debated at the European Council held on  24-25 March and we can expect sparks to fly over contentious issues such as the harmonisation of corporate tax rates and the retirement age. There are also calls for Wage Indexation to be abolished  (this is where social welfare and other payments are calculated based on the average wage as opposed to inflation or price levels)

In his piece, Gros states that there are two underlying hypotheses which provide the basis for the Competitiveness Pact:

  1. If we fix (relative?) wages no external imbalances can arise since relative costs determine export performance.
  2. Higher productivity always means more ‘competitiveness’, and is thus always useful to reduce divergences.
These are not necessarily true, argues Gros and so the logic behind the Pact is flawed.

Read it at the Eurointelligence website here.
The Franco-German Competitiveness Pact is available here.
And some background on the issue is available on the Euractiv news website here.

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