The euro zone’s recovery is slowly under way. Data for the first quarter of 2014 published last week confirmed that real GDP growth is on an upward trend in Germany and Spain while France and Italy continue to lag behind.

This two-speed growth performance is mainly driven by the extent to which each euro zone country has managed to gain competitiveness in the last few years by reducing its unit labor costs relative to Germany, according to a QNB Group report.

Unless this internal adjustment process continues, the growth performance in the single currency area will diverge further, with important implications for the stability of the euro zone.

Data for the first quarter of 2014 indicate a two-speed euro zone recovery.

What explains this two-speed expansion in the euro zone? The answer is competitiveness measured by unit labor costs — the cost of labor for one unit of production.

What drives growth is the ability of businesses to compete in the global economy, which largely depends on their labor costs, particularly in advanced economies. As unit labor costs rise without a corresponding rise in labor productivity, businesses lose competitiveness.

A sufficiently large loss of competitiveness can force businesses to reduce their activities or even shut down.

At an economy-wide level, a loss of competitiveness means lower growth and higher unemployment as both external and domestic demand for the country’s goods and services weaken. This is even more evident in countries with a common currency like the euro zone where the option to regain competitiveness by weakening the currency is unavailable.

The economic story of the euro zone for the last 15 years is very much one driven by unit labor costs.

Starting in early 2003, Germany implemented a series of labor market reforms aimed at reducing unit labor costs in order to increase the competitiveness of German businesses and reduce unemployment.

These reforms — named after Peter Hartz, the head of the commission that recommended them — have managed to keep unit labor costs well below the euro zone average for the last 12 years, resulting in higher German economic growth and one of the lowest unemployment rates in Europe.

Other countries in the euro zone did not follow the German example right away. As unit labor costs rose rapidly during the last decade in the euro zone periphery (Greece, Ireland, Portugal and Spain), their economies became uncompetitive and turned inwards to domestic sectors (e.g., the real estate sector) to maintain the growth momentum. Eventually, the rising gap in unit labor costs between Germany and the euro zone periphery became so large that it forced an abrupt outflow of capital as the economy could no longer generate the required returns, thus unleashing the euro zone crisis. Since then, it has been a painful road for Greece, Ireland, Portugal and Spain to adjust unit labor costs down by reducing government spending and thus repressing domestic demand in order to regain competitiveness. The first dividends of this painful adjustment are starting to pay off in Ireland and Spain, while more is still needed in Greece and Portugal.

Unit labor costs, however, continue to rise in France and Italy. Notwithstanding the painful lessons of the euro zone crisis, the second and third largest economy in the euro zone have not yet mustered the political will to implement the necessary reforms and thus unit labor costs are now the highest in the Eurozone. As a result, France and Italy continued to lag behind the euro zone recovery in the first quarter of 2014 and registered record-high unemployment rates.

Overall, the euro zone recovery remains fragile and predicated on continued adjustment in unit labor costs.

What is worrisome is the continued divergence in growth performance between Germany and Spain on the one hand and France and Italy on the other, reflecting the necessary adjustment in unit labor costs still needed in the latter two economies.

Without such adjustment, the economic recovery could unravel, calling into question the stability of euro zone once again.