The external labour cost competitiveness of peripheral Eurozone economies continued to improve in the first quarter of 2012, although the gap with Germany remains large.

The charts show real effective exchange rates (REERs) based on unit labour costs, as calculated by the ECB. These measure costs in each country relative to a trade-weighted basket of its competitors within and outside the Eurozone*, expressed in a common currency. The indices are rebased to 100 in the first quarter of 1999, when EMU started.

Pressure for peripheral cost adjustment ratcheted up in mid 2010 after the first Greek crisis / bail-out. In the 18 months from the third quarter of 2010 to the first quarter of 2012, REERs fell by 7.1% in Spain, 5.4% in Greece, 4.6% in Ireland, 2.8% in Portugal, 1.3% in Italy, 0.6% in France and 0.5% in Germany. (All countries benefited from a fall in the euro over the period.)

Spain’s REER is now below its EMU starting level, in contrast to rises in France and the Netherlands.

Peripheral countries, of course, may have locked into EMU with overvalued exchange rates, implying that further downward adjustment will be required to lay the foundation for export-led growth. The REERs, however, dispel the notion that they have suffered a major loss of competitivess relative to core countries – with the obvious exception of Germany.

*The external grouping comprises the 10 non-euro EU member states, Australia, Canada, China, Hong Kong, Japan, Norway, Singapore, South Korea, Switzerland and the United States.