In The Euro’s Difficult Future – Competitiveness Imbalances and the Eurozone’s North-South Divide author Luigi Bonatti, a professor of economics at the University of Trento in Italy, stresses that the existing North-South competitiveness divide creates growing tensions between member countries and fuels hostility towards European Union institutions. The paper illustrates why this competitiveness divide is structural, cannot be tackled by macroeconomic policies, and could threaten the euro’s survival.

Key Findings

  • Firms’ competitiveness is substantially affected by the characteristics—in terms of quality and cost—of the areas in which they are located.
  • Input cost differentials across areas are often insufficient to offset the gap in terms of overall productivity.
  • An area’s capacity to attract and foster the development of “competitive” firms is often enduring.
  • Competitive firms create “good” jobs, invest more, and allow regions to raise more tax revenues for any given tax rate.
  • Wide and persistent competitiveness imbalances bring about unequal distributions of high- and medium-value-added activities across regions and countries.
  • Persistent competitiveness imbalances collide with the worldwide tendency towards an equalization of workers’ education levels and aspirations.
  • Competitiveness imbalances between the eurozone’s North and South widened before the debt crisis, but the South masked the effects on income and unemployment by going into debt.
  • In the aftermath of the crisis, the divide in income and labor-market performance between the North and South has grown.
  • The widening structural divide between the eurozone’s North and South is increasing tension between member countries over economic policies and is fueling hostility toward European institutions.