Sectorial ULCs as measures of competitiveness : an analysis of southern euro area economies

Abstract

This article analyses developments in the international cost competitiveness of six southern euro area economies using newly developed Effective Exchange Rate indices. It argues that traditional aggregate ULC-based indicators suffer from a number of limitations. In particular, they are affected by shifts towards more labour intensive industries and are also susceptible to global trends in the ULCs of particular sectors. In this light, this article computes sectorial ULC-deflated Effective Exchange Rate indices for a selection of southern euro area economies, which apart from providing more detail at a sectorial level, are more robust to structural changes. The newly developed indicators show a considerable degree of heterogeneity in the sectorial competitiveness developments of some economies. Moreover the newly developed overall economy sectorial ULC-deflated indices tend to diverge considerably from the traditional aggregate ULC-based indicators for small open economies that have been undergoing fast structural changes. In particular, the use of traditional ULC-based indicators tends to over-state the loss in competitiveness for economies that have either a fast-growing, or a larger than average services sector.