Wages need to fall to Eastern European levels, or else production will be moved. Italian firm shifts production to Poland in the night. Coming soon to entire Eurozone. (my thanks to Dan for the link)
Editors note: Brent in his comment below correctly points out that it is productivity adjusted real wages to which I refer. Moreover, for Germany pairwise comparisons with other countries make these wages lower than they would be if they had their own currency because the Euro is an average currency, whose value is lower than the DM would be. For the periphery countries the effect is the opposite and this is what has lead to them importing at an accelerated pace from Germany (exporting their jobs) for much of the last decade. What is more, for good stretches of the last decade real wages in Germany have been declining (exhibiting much of the vaunted labour market flexibility despite an economy with significant union representation). Finally, in trade models with imperfect competition the lowest cost producer may be kept out of the market because an established player prevents them from getting down the cost curve to a an economic level of efficiency. One more potential hurdle confronting the PIIGS wrt to German competition.
Editors note: Brent in his comment below correctly points out that it is productivity adjusted real wages to which I refer. Moreover, for Germany pairwise comparisons with other countries make these wages lower than they would be if they had their own currency because the Euro is an average currency, whose value is lower than the DM would be. For the periphery countries the effect is the opposite and this is what has lead to them importing at an accelerated pace from Germany (exporting their jobs) for much of the last decade. What is more, for good stretches of the last decade real wages in Germany have been declining (exhibiting much of the vaunted labour market flexibility despite an economy with significant union representation). Finally, in trade models with imperfect competition the lowest cost producer may be kept out of the market because an established player prevents them from getting down the cost curve to a an economic level of efficiency. One more potential hurdle confronting the PIIGS wrt to German competition.
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