Some economists view the Eurozone crisis as driven by the deteriorating competitiveness of periphery countries (see Chen et al. 2012). Specifically, some analysts suggest that low competitiveness in the south is driven by exceptional growth of unit labour costs (Dadush and Stancil 2011). According to this view, increases of wage costs adjusted for productivity differences, or in short adjusted wage costs, made the exports of these countries uncompetitive.

Policy prescriptions to improve competitiveness that are based on this view have therefore focused on how to regain lost export market shares (see, for example, Dadush and Wyne 2012). Structural reforms may help but they take time.1 In the shorter term, increasing market shares can be achieved by increasing price competitiveness. Typically this is done by depreciating the currency. Since Eurozone countries cannot devalue their currency, policymakers should instead try to restore competitiveness through internal devaluation, i.e. by reducing adjusted wage costs.2 One estimate for Greece, for example, is that adjusted wage costs need to be reduced by 31%, effectively reaching the level of Turkey (Sinn, 2012).

...

A basic premise underpinning these prescriptions is that exporters from Eurozone crisis countries underperformed. In this article we argue that loss of export competitiveness is likely to be the main determinant of growing current account deficits only for France.3 In the Southern EZ countries current account deficits reflected an excessive increase in imports. In the run-up to the crisis, exporters from these countries could perform well on the international markets despite the rise in their countries' adjusted wage costs, because the bulk of the rise in wage costs occurred in the non-traded sector.