The signatures of euro area imbalances : export performance and the composition of ULC growth

Growing current account imbalances within the euro area between 1999 and 2007 were not driven by divergences in export performance between surplus and deficit countries. While current account dynamics are highly correlated with unit labour costs (ULC) and imports, it is not the case for exports. Rising unit labour costs were not the source of the original demand shock but a symptom and they were not necessarily associated with losses in export competitiveness. In this policy brief, we decompose ULCs into the share of labour compensations in nominal VA and the price of VA using detailed sectoral data. We show that the bulk of the appreciation in unit labour costs is due to price developments in the nontradable sector, explaining the disjunction between traditional measures of cost competitiveness (aggregate ULCs) and export performance.