Competitiveness within the Euro Area:: The problem that still needs to be solved

Unsustainable public debt, low competitiveness and high current account deficits are major problems for the so-called PIIGS countries. These countries experienced consumer price and wage inflation above the euro area average in the first decade of the euro, basically fuelled by buoyant capital inflows. The resulting real appreciation against low-inflation countries led to a deterioration in their competitiveness, but rigid labour markets now prevent a quick market-based readjustment of real wages to the changed situation. Thus, both public expenditure cuts and structural labour market reforms are urgent to reduce the likelihood of a euro area break-up.