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18 Mar 2011

Competitiveness Pact: Flawed economics?

Daniel Gros

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The economic philosophy behind the Competitiveness Pact now before the European Council can be summarized by two hypotheses:
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.
On first sight, this Commentary finds that both theses seem to make sense, but on closer inspection, neither corresponds to reality.
Daniel Gros is Director of the Centre for European Policy Studies (CEPS), Brussels