In the race regain competitiveness, the critical difference is Iceland’s capacity to devalue its currency. The result? Icelands unit labour costs have fallen by 29% over the past 12 months, whilst Ireland’s dropped by only 4.3%. The FT’s Brussels blog:
…the hard truth is that Ireland – like fellow eurozone members Italy, Greece and Spain – has a long and hard road ahead to claw back its competitiveness. And this is a lesson with even broader implications for Europe. For when the dust settles, it may well emerge that the financial crisis has served to accentuate the differences in competitive advantage in the eurozone between, on the one hand, Germany and other star performers such as Finland and the Netherlands and, on the other, Ireland and the Mediterranean countries.