page_title: European debt crisis
section_title: Increase competitiveness
hierarchical_section_title: European debt crisis / Economic reforms and recovery proposals / Increase competitiveness
caption_attribution_description: Overall economic health and adjustment progress of Eurozone countries 2011-2012 according to "Euro Plus Monitor 2012" (see: http://www.lisboncouncil.net//index.php?option=com_downloads&amp;id=723&#160;; table 27-28). Indicators are measured from 0 (bad) to 10 (excellent) performance.
context_page_description: The European debt crisis is a multi-year debt crisis that has been taking place in the European Union since the end of 2009. Several eurozone member states were unable to repay or refinance their government debt or to bail out over-indebted banks under their national supervision without the assistance of third parties like other eurozone countries, the European Central Bank, or the International Monetary Fund.
  The eurozone crisis was caused by a balance-of-payments crisis. The crisis was worsened by the inability of states to resort to devaluation. Debt accumulation in some eurozone members was in part due to macroeconomic differences among eurozone member states prior to the adoption of the euro. The European Central Bank adopted an interest rate that incentivized investors in Northern eurozone members to lend to the South, whereas the South was incentivized to borrow. Over time, this led to the accumulation of deficits in the South, primarily by private economic actors. A lack of fiscal policy coordination among eurozone member states contributed to imbalanced capital flows in the eurozone.
context_section_description: Crisis countries must significantly increase their international competitiveness to generate economic growth and improve their terms of trade. Indian-American journalist Fareed Zakaria notes in November 2011 that no debt restructuring will work without growth, even more so as European countries "face pressures from three fronts: demography (an aging population), technology (which has allowed companies to do much more with fewer people) and globalisation (which has allowed manufacturing and services to locate across the world)".
  In case of economic shocks, policy makers typically try to improve competitiveness by depreciating the currency, as in the case of Iceland, which suffered the largest financial crisis in 2008–2011 in economic history but has since vastly improved its position. Eurozone countries cannot devalue their currency.
  Internal devaluation
  As a workaround many policy makers try to restore competitiveness through internal devaluation, a painful economic adjustment process, where a country aims to reduce its unit labour costs. German economist Hans-Werner Sinn noted in 2012 that Ireland was the only country that had implemented relative wage moderation in the last five years, which helped decrease its relative price/wage levels by 16%. Greece would need to bring this figure down by 31%, effectively reaching the level of Turkey. By 2012, wages in Greece had been cut to a level last seen in the late 1990s. Purchasing power dropped even more to the level of 1986. Similarly, salaries in Italy fell to 1986 levels and consumption fell to the level of 1950.
  Other economists argue that no matter how much Greece and Portugal drive down their wages, they could never compete with low-cost developing countries such as China or India. Instead weak European countries must shift their economies to higher quality products and services, though this is a long-term process and may not bring immediate relief.
  Fiscal devaluation
  Another option would be to implement fiscal devaluation, based on an idea originally developed by John Maynard Keynes in 1931. According to this neo-Keynesian logic, policy makers can increase the competitiveness of an economy by lowering corporate tax burden such as employer's social security contributions, while offsetting the loss of government revenues through higher taxes on consumption (VAT) and pollution, i.e. by pursuing an ecological tax reform.
  Germany has successfully pushed its economic competitiveness by increasing the value added tax (VAT) by three percentage points in 2007, and using part of the additional revenues to lower employer's unemployment insurance contribution. Portugal has taken a similar stance and also France appears to follow this suit. In November 2012 French president François Hollande announced plans to reduce tax burden of the corporate sector by €20 billion within three years, while increasing the standard VAT from 19.6% to 20% and introducing additional eco-taxes in 2016. To minimise negative effects of such policies on purchasing power and economic activity the French government will partly offset the tax hikes by decreasing employees' social security contributions by €10 billion and by reducing the lower VAT for convenience goods (necessities) from 5.5% to 5%.
  Progress
  On 15 November 2011, the Lisbon Council published the Euro Plus Monitor 2011. According to the report most critical eurozone member countries are in the process of rapid reforms. The authors note that "Many of those countries most in need to adjust [...] are now making the greatest progress towards restoring their fiscal balance and external competitiveness".
  Greece, Ireland and Spain are among the top five reformers and Portugal is ranked seventh among 17 countries included in the report (see graph).
  In its Euro Plus Monitor Report 2012, published in November 2012, the Lisbon Council finds that the eurozone has slightly improved its overall health. With the exception of Greece, all eurozone crisis countries are either close to the point where they have achieved the major adjustment or are likely to get 
caption: Eurozone economic health and adjustment progress 2011–2012 (Source: Euro Plus Monitor)[348]
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