Fault Lines Beneath the Euro Area: an SVAR Analysis of the Price-Export-productivity Nexus

Since the euro’s introduction, the currency union has experienced persistent macroeconomic divergence, challenging the anticipated convergence of its member states. While trade imbalances and competitiveness disparities, driven by divergent labour cost dynamics, have been widely debated, the underlying macroeconomic mechanisms remain largely underexplored. We put under empirical scrutiny one potential driver of divergence, namely cumulative causation: according to this approach, initial competitiveness differences, triggered by misaligned wage and productivity trends, create a feedback loop where improved price competitiveness boosts exports, enhances productivity via increasing returns to scale, and further reinforces competitiveness. Using a structural vector autoregression (SVAR) approach, this paper empirically investigates whether this mechanism shaped macroeconomic outcomes within the euro area over the period 1995–2022. Our findings point to the presence of a feedback mechanism that amplifies macroeconomic divergence: initial differences in competitiveness are reinforced in the medium run by a factor of approximately 1.5, with around 15