Update on euro-area periphery adjustment

Greece
Ireland
Italy
Portugal
Spain
Inflation (HICP)
Feb 2011
4.2
0.9
2.1
3.5
3.4
Labour costs
2010q4
-6.6
-3.1
1.8
4.2*
-0.8
REER (BIS)
Jan 2011
-0.8
-5.9
-4.5
-1.5
-2.6

sources: Eurostat; national authorities.
all figures are percent y/y
* 2011q1.

Note:
euro (vs usd) change Jan2011/Jan2010 is -4.0%.
euro (NEER; BIS) change Jan2011/Jan2010 is -7.8%.

Since this issue is back on the boil with a pretty stern message from Germany in advance of the next instalment of official discussions to alleviate the woes of peripheral euro-zone members, i.e. those in the table above, it’s time to revisit some indicators of adjustment in the affected economies. What the data above tell me is that euro weakness — particularly on an effective basis — has been doing most of the work of getting prices down in these economies vis-a-vis rest of world. Inflation rates are stubbornly high and only in Greece and Ireland are labour costs falling. Note also that, for Greece, the improvement in the real exchange rate is minimal. One concern this all raises is the impact of a rally in the euro.

Glossary: “Effective” means trade-weighted, i.e. the exchange rate of the euro against all of its trade partners.

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