Is the Intellectual Edifice of the Competitiveness Doctrine crumbling as well ?

Following the crumbling of "the intellectual edifice of austerity economics" (see also "Austerity....in Europe - economic incompetence or indoctrination ?") and the waning political support of austerity measures in the euro zone (see "Public Opinion in Germany turning broadly against Austerity"), the intellectual edifice of the Anglo-Germanic competitiveness doctrine (see also here) seems to be wasting away as well.

A recent World Bank contradicts the competitiveness doctrine with evidence that "changes in competitiveness, measured by real exchange rates or by unit labour costs, have not been strongly associated with external imbalances in the Eurozone periphery" (see the table below from the World Bank study "Tracking the causes of Eurozone external imbalances: new evidence", Sanchez and Varoudakis, February 2014). Instead, Sanchez and Varoudakis' analysis corroborates that:

"....the growing external imbalances in the Eurozone periphery were mainly driven by a domestic demand boom triggered by greater financial integration and the resulting surge in credit and intra-regional capital flows.".... "Growth and real interest rates have played a more important role in current-account dynamics in the Eurozone periphery than in the core."

Percentage of variation in current account explained by column variable

 (panel VAR estimated over 1996–2011)

Source: World Bank study, Sanchez and Varoudakis, February 2014, Table 1.

Savings–investment imbalances and competitiveness gaps 

in the Eurozone core and periphery (1990–2011)

Source: World Bank study, Sanchez and Varoudakis, February 2014, Figure 2.

Translating from economeze to understandable english: Sanchez and Varoudakis found that the introduction of the euro and the consequential disappearance of exchange rate risk in the euro zone led to a surge of capital flows from the capital-rich core to the periphery. This capital surge in turn led to increases in economic growth, unit labor costs, and prices; thus, to an increase in inflation rates, a decline in real interest rates, and an appreciation of the real exchange rates of the euro zone periphery countries vs. the core. As a logical economic consequence of these developments, the current account balances of the euro zone periphery countries registered growing deficits while current accounts in the euro zone core showed rising surpluses, thus generating growing imbalances in the euro zone as a whole.

Given these developments, the often proclaimed loss of competitiveness due to higher unit labor costs is an endogenous explanatory factor for the problems in the euro zone periphery, i.e. a factor derived from other, more significant, economic developments as described above. Hence, the policy recommendations to correct the problems in the euro zone periphery should be directed at the economic factor(s) that caused the problems, in this case mainly the capital surge from the euro zone core.

Sanchez and Varoudakis hold similar views, albeit framed in rather 'diplomatic' language. They conclude that "Tighter regulation of credit markets, including through macroprudential measures, might .... be needed to thwart excess leverage and concentration of lending in investments prone to speculative bubbles."

With respect to the ill-advised, deflationary competitiveness measures favored by Merkel & Co. (i.e. cuts in wage and non-wage labor costs to reduce unit labor costs = internal devaluation), they suggest that "Internal devaluation may have certainly contributed to a contraction of domestic demand....an unintended consequence of this correction has been a potentially large redistribution of income at the expense of wage earners in the periphery." 

Finally, Sanchez and Varoudakis recommend a very different reform agenda to remedy external balances, prevent future crises, and attain medium-term economic growth:

"Structural reforms that improve the business environment and investments that enhance productivity hold the key to external rebalancing and stronger medium-term growth (Gill and Raiser 2012). This broader structural reform agenda, as well as complementary, productivity-enhancing public investments in physical and human capital, should not be lost from sight ...."

Quite in line with my own policy recommendations, with the exception of the well-worn phrase "structural reforms that improve the business environment" (code for wage-depressing, deflationary labor market liberalization).