Macroeconomic Imbalances and Structural Change in the EMU

Macroeconomic imbalances in the EMU are at the heart of the current crisis. A widely popular explanation for the high current account deficits in the Southern European countries is that they lack a large, competitive and export-oriented industrial sector. The paper tests the hypothesis that parts of the structural change which happened in the EU before 2008 were supported by the divergent unit labour cost developments in the EMU. We look into patterns of structural change and sectoral competitiveness in all EU member countries and assess their linkages by means of a descripitve analysis as well as through econometric estimations. Our results broadly support the hypothesis. Structural policies alone to foster new competitive export-oriented industries in Southern Europe in order to reduce macroeconomic imbalances in the EMU would not be efficient without accompanying adjustments in relative labour costs.