The report focuses on three economies that have grown more slowly than the EA overall on average since 1999: Germany, Italy and Portugal. "Wage discipline and strong productivity growth have boosted the competitiveness of the German economy, and Germany is starting to reap the rewards, as its economic recovery in 2006 testifies. Italy and Portugal have failed to adapt as well," said Andrew Colquhoun, Director in Fitch's Sovereigns group.
Fitch comments that the German economy shows signs of greater nominal flexibility than either Italy or Portugal. Below-trend output has been accompanied by a slowdown in the growth of prices and wages, allowing German businesses to price themselves back into EA markets.
The different experiences of EA members appear to have their roots in the pre-euro period, with Italy and Portugal having relied more on currency depreciation to sustain their external competitiveness before 1999, a crutch that has now been kicked away.
However, the process of regaining competitiveness can be a painful one. "Lost output and lower inflation in the slowdown put pressure on the public finances. This heightens the importance of solid fiscal management in good times," said Fitch's Colquhoun. Countries with strong public finances have more room for some deterioration in a slowdown, without being forced into pro-cyclical fiscal tightening.
Fitch's report also focuses on Spain, an economy showing worrying signs of loss of competitiveness and which may be due for a corrective slowing in growth. In stark contrast to the situation in Italy or Portugal, Spain will face any required adjustment with solid public finances, including a government debt to GDP ratio below the 'AAA' median.
