4  The fundamental welfare economics at work here is developed in John Geanakoplos and Heracles M. Polemarchakis (1986), “Existence, Regularity, and Constrained Suboptimality of Competitive Allocations When the Asset Market Is Incomplete,” in Walter P. Heller, Ross M. Starr, and David A. Starrett, eds., Essays in Honor of Kenneth Arrow: Vol 3., Uncertainty, Information, and Communication (New York: Cambridge University Press), pp. 65-95.
This correlation suggests that closing the competitiveness gap is a key component of improving the current economic situation. Closing the competitiveness gap One way to regain competitiveness quickly is to address the numerator in unit labour costs – nominal wages. Another, longer-term approach is to increase the denominator – to achieve higher productivity. In my view, in the euro area today we need both.