Tuesday, February 3, 2009

European Labor Productivity

Absolute Return Partners (via InvestorsInsight) dives into a topic I asked for reader help (and received a bunch of great comments) not too long ago... can the Euro survive? While the article goes into much greater detail about why the European Union is /isn't in trouble, the below portion details how a single currency removes the option for the "PIGS" (Portugal, Italy, Greece, and Spain) to devalue their currency to remain productive:


Since the introduction of the euro, the PIGS have failed miserably to keep up with Germany on this measure of competitiveness. So has Ireland by the way, hence its current predicament.
EU countries outside the euro zone, such as the UK, have also lost out to Germany in recent years, but the UK has been able to play a card which is not at the disposal of the euro zone members. That card is called devaluation. Whether by design or otherwise, the UK has received a massive boost to its competitiveness in recent months as a result of the sharp fall in the value of the pound. Italy used to play this card repeatedly back in the days of the Lira. So did countries like Denmark in the dark days of the 1970s.