Price flexibility allows for the recovery of any loss in competitiveness, and fosters a faster adjustment of relative prices, which, in the absence of exchange rate adjustment, is crucial for the rapid reallocation of production resources to the most dynamic sectors and firms.
According to a European Commission study, price flexibility and the rapid reallocation of resources require wage flexibility, ease of market entry of new firms, an effective and efficient insolvency framework including a second chance for entrepreneurs, a friendly environment for doing business, a well-functioning justice system, low levels of corruption, the availability of high quality public services and public infrastructure, and a regulatory framework conducive to competition.