Competitive (Dis)Orientation. WWWforEurope Policy Paper No. 2

After the financial market and economic crisis, a focus on competition and competitiveness in general were once again the dominant economic leitmotif in Europe. This analysis investigates whether and to what extent this is justified in economic terms. In view of the continuing dominance of domestic demand in almost all European countries, a loop-sided focus on competition will displace the economic essentials from our viewing angle. This also goes for the elimination of imbalances in the current accounts, especially those in the euro area, where the focus on competition leads to overestimating the importance of goods exports and their prices, and underestimating overall demand and income growth. A narrow focus on "competitive" unit labour costs fails to adequately explain actual price increases or export development. A breakdown of domestic price growth by unitised wages, profits and taxes for a selection of euro-area countries shows that in the eight years prior to the economic crisis it was the profits that contributed most to price increases. Accordingly, European economic policy reforms actually aim at a powerful myth rather than an effective economic policy strategy.