Patterns of Convergence (Divergence) in the Euro Area: Profitability Versus Cost and Price Indicators

29 Pages Posted: 9 Feb 2018

Date Written: December 28, 2017

Abstract

We analyse patterns of convergence (divergence) across euro-area countries in manufacturing since monetary union and find that not only costs, but also profitability have followed divergent paths. We further find that profitability developments only partially overlap with those of unit labour costs and producer prices, more extensively studied in the literature. Considering the largest countries, profitability in manufacturing in Germany and Spain has risen by comparison with non-tradables and with respect to France and Italy, where profit margins in manufacturing have declined and have lost ground with respect to the non-tradable sector. We show that these developments are correlated to the relative export performance of these countries. This correlation also holds in a two digit sector-level panel analysis, comprising all the euro-area countries that first entered the monetary union. This is consistent with the recent international trade literature, according to which successful exporting firms, which are more efficient or produce better products, also charge higher mark-ups. Turning to Italy, after a protracted decline both export shares and profit margins in manufacturing have improved in recent years, which is consistent with a recovery in external competitiveness.

Keywords: euro area, profit shares, profit margins, export shares, unit labour costs

JEL Classification: D33, D4, J3, L1, F10

Suggested Citation

Amici, Monica and Bobbio, Emmanuele and Torrini, Roberto, Patterns of Convergence (Divergence) in the Euro Area: Profitability Versus Cost and Price Indicators (December 28, 2017). Bank of Italy Occasional Paper No. 415, Available at SSRN: https://ssrn.com/abstract=3121135 or http://dx.doi.org/10.2139/ssrn.3121135

Monica Amici

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Emmanuele Bobbio

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Roberto Torrini (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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