Italian Manufacturing of car

Just how Greece is hogging headlines and tormenting heads of state, you’d think a “Grexit” could be the biggest threat towards the eurozone’s future. It isn’t. The greatest danger—and it’s being mostly ignored—is the shocking slide in competition associated with the single currency’s 2nd- and third-largest economies, France and Italy. One condition encapsulates Europe’s énorme problème: France can’t offer cars.

Quite simply, the cost of making items in France is far higher than when you look at the countries it competes with. The hourly labor expenditure of manufacturing a car or metallic ray in France rose 17per cent over the past ten years, above two times the rise in Germany. And although earnings have just tracked rising prices since 2008, prices keep climbing because employees are getting less much less effective. That’s mainly because France’s producers are starved for earnings they can’t manage to replace or refurbish antiquated plants also it systems.

By contrast, Ireland, Spain, and Portugal have all acted while France fiddled, liberalizing their labor markets and reducing device expenses in the last six years by 7percent to 12percent. The outcome have been disastrous for France’s competitiveness. In past times decade its share of all of the EU exports dropped from 12percent to 9.5%, the worst overall performance of any major country in west Europe.

And it’s not just France that is struggling. Italy’s products are now even pricier. Through the late 1990s to mid-2000s, Italy’s manufacturing expenses exploded. “Italy may be the country I’m viewing, ” says Uri Dadush, an economist at the Carnegie Endowment. “It’s lost a massive level of competitiveness to Germany, and things aren’t enhancing.” Inspite of the reform efforts of Prime Minister Matteo Renzi, Italy nevertheless sets earnings primarily by national labor agreements that ensure pay rises faster than output.

That brings united states on financial bellwether for the two nations—cars. Both France and Italy mainly manufacture affordable autos. Because they’re basic transportation, the Peugeots, Renaults, and Fiats need affordable prices and reduced costs to offer really yourself as well as in other European nations. Germany, that has lower prices and sells even more luxury cars, isn’t at the mercy of the same limitations.

In past times decade the number of vehicles offered in west European countries by France’s Renault and Peugeot dropped from 3.5 million to 2.5 million. Meanwhile, the number of vehicles offered by Germany’s VW, Daimler, and BMW increased by 200, 000 to 4.5 million, despite a decline within the European market.

That downward trend reversed in the 1st four months of this 12 months, as French and Italian exports surged. But a principal catalyst ended up being the decline in the value of the euro vs. various other world currencies. That take the countries just to date. Only reductions in pay, shedding rigid work laws, and a move to high-margin products will restore their flagging exports, and both France and Italy tend to be regressing because their rivals march forward. The euro’s next existential crisis won’t occur from a weakling state but from these two big, crucial economies that too little tend to be seeing.

a version of this article appears within the August 1, 2015 problem of Fortune magazine using the headline “Europe’s genuine Problem: France Can’t Sell Cars.”