The improvement in competitiveness in southern euro zone nations has left some core countries such as Belgium and France lagging behind, posing the risk that they could become the "new periphery," a new report warns.
"A handful of core euro zone economies have registered pretty sharp increases in their unit labor costs (ULCs) over the past four years," according to a report by Capital Economics published Monday.
This was happening at the same time as those in many peripheral countries had been falling outright, it said.
"While this process may help the peripheral economies regain relative competitiveness more rapidly, some core economies, including Belgium, now look at risk of falling behind, threatening to push the euro-zone's periphery north," Roger Bootle and Jonathan Loynes, managing director and chief European economist at Capital Economics respectively, said in their report.
The report analysed changes in competitiveness in the euro zone by looking at unit labor costs (the average cost of labor to produce one unit of output) across the region.
On this metric it found that the southern peripheral economies comprised of Spain, Italy, Ireland and Portugal "have succeeded in cutting costs relative to the euro zone as a whole over the past few years." However, in a handful of core economies, notably Belgium, Finland and France, ULCs have continued to rise, both in absolute terms and relative to the euro zone average.
"In Belgium in particular, ULCs have risen sharply and are now the highest in the euro-zone. Belgium's high costs already appear to be harming both investment and export growth, traditionally strong drivers of growth in the economy. And its current account has fallen into a sustained deficit for the first time in 30 years."
"All this suggests that Belgium's recovery is unlikely to gather further pace [and] in contrast to governments in the south, we doubt that Belgian politicians will be prepared (or forced) to tackle these issues any time soon." they added.
While many peripheral euro zone governments have been busy implementing policies to improve the functioning of their labour and product markets -- driven by having to make structural reforms as a condition of international bailout programs -- the reform drive in a number of core economies "has been almost non-existent," Bootle and Loynes said.
As such, this group of core economies "now looks at risk of facing the sluggish growth outlook and associated problems that have plagued the southern euro zone economies over the past five years."
"It is surely no coincidence that these countries' economic fortunes already appear to have weakened: Finland's economy remains mired in recession, France has stagnated since the start of the year, and the Belgian recovery slowed sharply in the second quarter," Loynes and Bootle said.
"Indeed, the cost gap that has emerged between Belgium and the euro zone as a whole is now as wide as it was for the peripheral economies in 2005."
While the report might not sound a positive note for the core economies mentioned, a relative loss of competiveness implies a corresponding gain elsewhere, Bootle and Loynes said.
"Indeed, if members of the euro zone core are losing cost competitiveness relative to the euro zone periphery, then the region as a whole should be becoming better balanced, which might make the euro-zone's recovery more sustainable."