In a monetary union, the exchange rate can’t be used to regain competitiveness vis à vis the other countries in the union, so wage setting discipline or even wage cuts tend to be used to restore price competitiveness. This is called internal devaluation. The chart compares for a number of countries the cumulative change in unit labour costs since 2009 (which coincides with their peak) (vertical axis) and the cumulative change in exports since 2008 (horizontal axis).

Graph 17 7

The difference between Ireland, Spain and Portugal on the one hand and Greece on the other is striking. Though all four saw significant declines in unit labour costs, Greece is the only country where, counterintuitively, exports actually declined (the others witnessed a sizeable increase). This suggests that, at least for Greece, labour costs are only part of the story in explaining export performance. By extension, one can argue that currency depreciation (thinking of the Grexit debate) would not be a miracle solution, far from that. In a recent paper Uwe Böwer and his co-authors argue that competitiveness also depends on political stability, enforcement of contracts, regulatory quality etc., adding that in most of these dimensions of institutional quality, Greece ranks low in international rankings. Structural adjustment, broadly defined, should enable the country to improve its export performance.