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Which euro-zone countries still suffer from “Dutch disease”?

Author: Patrick Artus. FLASH ECONOMICS ECONOMIC RESEARCH, April 21, 2016 – No. 392

Monday 25 April 2016, by Carlos San Juan

Dutch disease is a situation where the price of services (more generally, goods that are not traded internationally) increases relative to the price of industrial products (goods traded internationally), leading to a higher return on capital in (domestic) services than in industry (and industry-related services) and resulting in a transfer of capital to services, deindustrialisation, declining sophistication of the economy and external deficits. Dutch disease can have several causes: in its initial version, the fact that commodity revenues are partially spent on services, which drives up the price of services; but it can also arise due to weak competition in services relative to industry, the effects of an overvalued exchange rate, etc. We examine the situations of Germany, France, Spain and Italy. • Have these countries suffered from Dutch disease, and in which periods? France, Spain and Italy have suffered from Dutch disease since the 1990s. • Have recent developments (depreciation of the euro, fall in commodity prices; in some countries increased labour market flexibility, reduction in labour costs, reduction in corporate taxes) caused Dutch disease to subside in any of these countries? This is the case in France and Spain.

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