Competitiveness divergence in the euro area: rediscovering Kaldorian cumulative causation

Abstract In recent decades, models of circular and cumulative causation (CC), based on the endogenous relationships between prices, exports, and labor productivity, have lost prominence in explaining economic dynamics, such as the divergence within the euro area. We argue that the combination of price-sensitive exports and the triggering effect of exports on productivity can enable feedback loops, significantly shaping macroeconomic reality in the short-to-medium run. We apply an adapted model of export-led CC to 10 major countries belonging to the euro area, a region characterized by divergent wage growth trajectories, reflected in divergent export competitiveness and a lack of equilibrating mechanisms. Using quarterly data over the period 1995–2020, we estimate a system of equations combining autoregressive distributed lag and instrumental variable techniques to identify causal relationships among key variables. Our findings suggest that the price-export-productivity mechanism has amplified productivity disparities within the euro area, reinforcing divergence. While wages act as a potential trigger through their impact on price competitiveness, they also serve as a central factor that retards the feedback mechanism due to the indirect scale effect of wage-induced domestic demand. Overall, our results affirm the significance of export-led CC while also delineating its limitations.