Euro has damaged Spain's competitiveness

21st December 2004, Comments 0 comments

21 December 2004, BRUSSELS- Spain is one of the euro-zone countries to have lost out most in international competitiveness since the euro began to appreciate against the dollar, an European Commission report revealed.

21 December 2004

BRUSSELS- Spain is one of the euro-zone countries to have lost out most in international competitiveness since the euro began to appreciate against the dollar, an European Commission report revealed.

"From the first quarter of 2002 to the fourth quarter of 2004, Italy, Greece, Portugal and Spain saw the highest losses in both price and cost competitiveness," the EC's latest quarterly report on the euro area said.

The euro has appreciated about 40 percent against the dollar since the start of 2002.

Spain has suffered from stubbornly high inflation, which makes its exports relatively more expensive. The differential between consumer inflation in Spain and the average in the euro-zone in November widened to 1.3 percentage points from 1.2 points in October.

Understandably, Spain's loss of competitive applies both to trade within the euro-zone, which accounts for about 60 percent of the country's exports, as well as globally.

The EC report, which was drawn up by the commissioner for economic and monetary affairs, Spaniard Joaquín Almunia, said the underlying causes of a loss of price competitiveness could be due to a number of reasons such as excessive unit labour costs, and wage rigidities.

Most collective bargaining agreements in Spain contain clauses that index wages to inflation.

A number of multilateral agencies such as the International Monetary Fund have urged the Spanish government to introduce reforms to the country's labour market to boost productivity.

The strength of the euro has put a damper on euro-zone economic growth as a whole.

The EC report noted that economic growth in the euro-zone in the third quarter of 2004 at 0.3 percent, compared with 0.5 percent in the second quarter. This reflected a negative contribution of 0.7 percentage points in the period July-September after a positive contribution of 0.3 points the previous two quarters.

"Overall, recent developments suggest that risks to the short-term growth outlook have not abated, particularly since sharp and disorderly exchange rate adjustments may entail export losses," the report said.

Nonetheless, the Commission pointed to the fact that oil prices are currently below its assumptions, and said it was sticking to its base scenario for growth this year and next of 2 percent

It pointed out that the strength of the euro and more rapid gains in labour productivity have also helped subdue inflationary pressures despite high energy prices.

The Commission said in real exchange rate terms, the strengthening of the euro against the dollar is also essentially the result of the dollar's weakness.

"While the euro is strong, its level is not yet substantially out of line with fundamentals," the report said.

[Copyright EFE with Expatica]

Subject: Spanish news

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