Conclusions

Abstract

Our analysis of the contribution of extra-regional trade deficits to the euro crisis and the role of the rise of emerging powers—BICs in particular—therein leads to grim conclusions. We concur with existing macroeconomic and political economy accounts of the crisis that the problems of the southern euro area member states are beyond cyclical but are structurally rooted in the diverging impact of the supranational monetary policy and domestic institutional capabilities to cope with these. However, we have shown that the southern member states’ problems run even deeper. Beyond problems to contain their cost competitiveness, they have a problem of non-price competitiveness as they produce an unfavorable basket of products that are of relatively low quality and in relatively low demand but faced with high competition. The rise of the emerging powers has reinforced all of these unfavorable dynamics. Our policy relevant conclusions are that the export-led growth strategy based on cost-cutting in the southern member states through internal devaluation is destined to fail. It will not solve the problem that these countries are ‘stuck in the middle’: too costly to compete on price with emerging markets and developing countries but insufficiently sophisticated to compete on quality with developed economies. An exit from the euro area would solve this problem neither. What the southern euro area countries need are not only structural microeconomic reforms but also structural transformation of the composition of their economy. We argue that a modern industrial policy targeted at developing (niche and elevator) sectors for the future rather than protect industries from the past and funded and supervised by supranational institutions represents the only viable and desirable ‘high road’ recovery and future growth path for the southern euro area member states, benefitting the region as a whole.