Competitiveness and Macroeconomic Imbalances in Eurozone Countries

This chapter argues that the key Eurozone imbalances are not a failure of nation states. At the heart of the integration process is the convergence criteria – limits on government deficit, debt, interest rate, inflation, etc. While these were intended to eliminate asymmetries across countries, the conception of convergence was too narrow since the euro designers completely ignored the elephant in the room – that countries were on different technological frontiers. I show that this difference is an important determinant of the key macroeconomic imbalances across the Eurozone. It follows that the primary convergence criterion should be limits on non-price competitive gaps across countries. The chapter overturns the simplistic view of price competitiveness and illustrate that the regulating forces of competition originate from productive structures.