Spain and Cyprus have seen improvements of 20–25 percentage points, while for Portugal the figure is around 15 percentage points. In each case, the largest part of the improvement has come from relative cost adjustments rather than changes in the nominal exchange rate. What is less well known is that we have also seen cost adjustments in surplus countries. In Germany, ULC growth relative to the euro area has accelerated strongly in recent years, on the back of more robust wage growth and slowing productivity. That has translated into a small correction in its cost position relative to its euro area partners. However, thanks to the depreciation of the euro exchange rate, Germany’s competitive position relative to the rest of the world has also improved during the crisis. Stable rebalancing Still, all this does not mean that the rebalancing process has reached its steady state, for two reasons. First, the fact that rebalancing has been achieved, to some extent, by falling potential growth is hardly satisfactory. We cannot have a situation where rebalancing only holds if potential growth remains low and unemployment high. Remember that, despite the notable improvements since 2013, in several stressed countries employment is still more than 10% below 2008 levels. Any external rebalancing that does not generate jobs is not one that will last. Achieving both external rebalancing and high employment requires a better reallocation of available resources, which means shifting resources to the tradable sector and, more generally, to the most productive firms operating within each sector of the economy.

This would  3  See ECB (2014), “To what extent has the current account adjustment in the stressed euro area countries been cyclical or structural?”, box in the Monthly Bulletin, January (https://www.ecb.europa.eu/pub/pdf/other/mb201401_focus05.en.pdf). See also IMF (2015), External Sector Report 2015 (https://www.imf.org/external/np/pp/eng/2015/062615.pdf), and European Commission (2015), “Rebalancing in the euro area: an update”, box 1.3 in the European Economic Forecast, Spring (http://ec.europa.eu/economy_finance/eu/forecasts/2015_spring/box3_en.pdf). BIS central bankers’ speeches  3  boost total factor productivity and, therefore, potential output on a long-lasting basis, and also make the necessary adjustment in relative costs more sustainable.4 Many countries still have a way to go in this regard. Admittedly, in many crisis countries ULCs have fallen and relative prices between the tradable and non-tradable sectors have adjusted. Yet sectoral labour flows show that, in the early phase of the crisis, there was no reallocation of jobs to the tradable sector. Rather, employment declined across all sectors in a context of collapsing domestic demand.5 More recently, although some countries have added jobs in the tradable sector, by far the largest sectoral contributor to employment gains has been the services sector, which in many countries is largely non-tradable.6 What is more, preliminary evidence shows that there is still a lot of progress to be made in the reallocation of resources within sectors. This plays an even more important role for total factor productivity growth in mature economies such as those in the euro area.7 All this points to a need for further internal adjustments.