A widely held belief in academic research is that strong wage bargaining coordination is essential for economic success in the Eurozone. Vytautas Kuokštis and Simonas Algirdas Spurga show this argument no longer holds if the economic performance of new member states is considered.
An influential body of academic research argues that the structure of the Eurozone favours export-driven economies in Northwestern Europe over economies in Southern Europe that rely primarily on domestic demand. As described by Alison Johnston and Aidan Regan, the “winners of European integration are those nation-states” that most closely resemble the ideal-type “primarily built in the image of the German economy”.
An important element of this is the role of wage bargaining by organisations like trade unions (often referred to as “corporatist institutions”). When these institutions are strong and work together effectively, there tends to be a high level of wage coordination across an economy. Countries with stronger wage coordination are viewed as being better equipped for export-led growth and therefore economic success within the Eurozone.
However, there are some notable blind spots in this perspective. First, the argument has focused mostly on the effect of wage coordination on external competitiveness, ignoring the most important indicator of long-run economic success – the growth of real GDP per capita.
Second, the academic literature almost exclusively covers the interaction between Northern and Southern Europe, overlooking the experience of the “newer” member states. In a new paper, we revisit the conventional wisdom and show that the assumed relationship between corporatist institutions and economic growth no longer holds when the Eurozone’s new member states are taken into account.
Wage bargaining coordination and international competitiveness
Wage bargaining coordination refers to the extent to which the process of negotiating wages and other employment terms is organised or harmonised across different levels of the economy, sectors or regions. Broad coordination of wage settlements can help achieve various national economic objectives. It has been shown to affect unemployment and inflation, wage inequality and global imbalances. However, discussions about the Eurozone usually emphasise the critical role of wage bargaining coordination in ensuring international competitiveness.
Numerous scholars describe how in the runup to the global financial crisis, Eurozone economies in Northern Europe employed their corporatist wage-setting institutions to promote an export-oriented growth regime. Coordinated wage bargaining facilitated economy-wide wage restraint, which constrained the growth of labour costs and ensured price-competitiveness. Consequently, the corporatist “North” produced persistent trade surpluses that were mirrored in the deficits of the “South”. As euro membership precludes nominal devaluation of the exchange rate, this unevenly distributed capacity to deliver wage restraint undermined the export competitiveness of less coordinated member states and laid the groundwork for the sovereign debt crisis.
During the post-crisis years, a new macroeconomic governance framework was introduced in the Eurozone, with the Stability and Growth Pact at its core. It has been viewed as further favouring (or even imposing) export-led growth strategies while constraining domestic demand-led models, with the Eurozone as a whole building up substantial trade surpluses. Under this setting, countries with stronger wage coordination are seen as better equipped to organise around the export sector, deliver wage restraint and adhere to the Eurozone’s rulebook.
A hump-shaped explanation
What happens if we consider countries that joined the Eurozone more recently – namely Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia and Lithuania? Looking only at the original Eurozone members (plus Greece) indeed suggests that greater coordination correlates with stronger long-run growth. But once we include these newer member states, the relationship between wage coordination and growth appears hump-shaped rather than linear, as shown in Figure 1.
Figure 1: Wage coordination and real GDP per capita growth within the Eurozone
Note: The figure shows the relationship between the average level of wage coordination in a country and average real GDP per capita growth. For more information, see the authors’ accompanying working paper.
In our paper, we perform extensive econometric tests, providing further evidence that an intermediate level of coordination is associated with a significantly lower real GDP per capita growth rate within the Eurozone, reduced by approximately 1.3-1.8 percentage points. This provides strong evidence that the assumptions about wage coordination and economic success in the Eurozone should be reconsidered.
Explaining the hump
The results described above are consistent with the classic work of Lars Calmfors and John Driffill. At intermediate levels of wage coordination, there is enough collective bargaining to create wage rigidities but not enough to internalise the broader economic consequences of wage settlements. In contrast, very low coordination tends to keep wages aligned with firm-level productivity, thanks to market discipline, while very high coordination allows for economy-wide wage restraint. In both cases, wage dynamics are consistent with maintaining external competitiveness.
In our study, countries such as Lithuania, Latvia, Estonia, and Malta – which have comparatively low levels of coordination – demonstrated the highest average growth rates. Meanwhile, Slovenia and Cyprus, with moderate levels of coordination, grew more slowly. This finding suggests that relying on corporatist institutions alone as a one-size-fits-all explanation for Eurozone success overlooks the reality in lower-coordination countries that are performing just as well or better than their highly coordinated counterparts.
These insights indicate the Eurozone can accommodate multiple types of capitalist models and that strong wage coordination is not the only pathway to success. For instance, our findings suggest that if Poland – currently a low-coordination country – were to adopt the euro, its growth prospects would not necessarily be jeopardised. A more nuanced look at wage bargaining institutions shows that both high and low coordination systems can thrive, while those caught in the middle may be at a distinct disadvantage.
This work was supported by the Lithuanian Research Council under Grant Number P-MIP-22-312.
Note: This article gives the views of the authors, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: European Union
