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This ‘Competitiveness’ Thing Is a Scam

By Rebecca Wilder

This ‘Competitiveness’ Thing Is a Scam

What is ‘competitiveness’? It’s an important part of the euro area leaders’ negotiated terms in the July 21st Summit announcement by the European Heads of State. The first paragraph, #4, and #11 of the announcement all refer to this issue of ‘competitiveness’:

We also reaffirm our determination to reinforce convergence, competitiveness and governance in the euro area.

create a Task Force which will work with the Greek authorities to target the structural funds on competitiveness and growth, job creation and training.

All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances.

It’s not totally clear what they mean by ‘competitiveness.’ However, I note that they separate the term ‘competitiveness’ from ‘macro-economic imbalances’. Current account imbalances across the region should be included in addressing ’macro-economic imbalances’.
Therefore, it’s bigger than the OECD definition of international competitiveness measure of a country’s advantage or disadvantage in selling its products in international markets.

See, ‘competitiveness’ is an elusive concept that is often associated with relative price movements, real exchange rates, or openness to international trade. But if we look at a May 2011 speech given by German Finance Minister, Wolfgang Schäuble, what he (and by association, the Germans) thinks of ‘competitiveness becomes more clear (h/t Marshall Auerback and bold by yours truly):

“All Eurozone governments need not only convincingly demonstrate their commitment to fiscal consolidation but also to increasing competitiveness to restore confidence of markets as well as their citizens.

Besides, one does not resolve one’s own problems of competitiveness by asking others to become less competitive and one cannot permanently close the gap between expenditure and income by asking others for more money.

the Eurozone has to put additional emphasis on strengthening the competitiveness of all its members. Consumption developments, bubbles in housing markets and the accumulation of external and internal debt in some Member States deepened the impact of the crisis and constrained the capacity to respond. This is why a new procedure for detecting and correcting economic imbalances will be introduced. This procedure will concentrate on curing the root causes of macroeconomic deficits by forcing Member States to ensure a high level of competitiveness.

Competitiveness is about strong macro-prudential policy, infrastructure, efficiency and income gains, saving, etc. Schäuble used the word ‘comopetitiveness’ 14 times in this speech – it’s an important part of his (and perhaps more broadly Germany’s) vision of the euro area’s structural construct. After reading the speech, you realize ‘competitiveness’ isn’t just about international trade and exports, it’s about the efficiency of an economy as a whole.

Now we’re on to something. The World Economic Forum measures competitiveness as a composite of various factors that describe institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation (.pdf link here, and composite technicals listed on .pdf page 49). The chart below illustrates the rankings of the euro area 12 and the USA (for comparison) as measured by the percentage of countries that rank below it across 142 developing and developed economies (.pdf page 15).

(Click to enlarge chart)

In 2011-2012, Germany ranks #6 out of 142 countries, where 95 of the 142 countries are less competitive than Germany. Also ranked below Germany is every euro area economy except Finland. So when a German finance minister says that he wants economies to increase competitiveness, he’s effectively saying that he wants economies to be more German. From the bottom up, countries should reform their education, financial markets, business sophistication, innovation, etc., all the while emulating those institutions in Germany.

Better put: being asked to increase competitiveness is really a scam to get these economies to become more ‘German’. If I were Italy or Spain or even Ireland (who by the way is very open but less ‘competitive’ according to this measure), I’d have a problem with that.

originally published at The Wilder View…EconoMonitor

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Germany is competitive on a relative basis as measured by productivity, standard of living or prices

The point of this article is to demonstrate that Germany has enjoyed increased ‘competitiveness’ as measured by productivity levels and relative prices. But the clarity of Germany’s ‘competitiveness’ cannot be established by using German data in the form of a black box – a bird’s-eye view of the region is the only way to see this.

In a very well written piece, Kantoos highlights that the German current account surplus is more a function of reduced investment and productivity passing through to low market-clearing wages than it is ‘competitiveness’, per se. While I agree with his economic analysis, I disagree that Germany is not competitive – Italy, yes; Germany, no.
(read much more after the jump!)

The term ‘competitiveness’ is rather non-discriminatory. It can refer to a lot of things. Below, I discuss national competitiveness, i.e., measuring a country’s relative position in the global market place. In contrast, micro-level competition – firms compete in various industries for market share and profits – is not really relevant here. The fact that we’re talking about a nation’s competitiveness means that it’s not clear how to measure competitiveness. Let’s explore.

In order for Germany to be deemed sufficiently ‘uncompetitive’ globally, relatively weak productivity gains would have left German wages relatively low compared to major trading partners. And by extension, Germany’s standard of living must also have suffer compared to its trading partners. From what I can see, only relative wages have been surpressed. Therefore, I conclude that Germany is competitive.

Exhibit 1: German productivity gains over the last decade – I use the period 2000-2008, so as to not bias the results downward from the global recession – have not been striking, but positive nevertheless.


German productivity has increased on a cumulative basis compared to Euro area trading partners, like France and Italy. Notably, the Euro area average is down, which is probably biased by Italy’s 8.7% cumulative drop in productivity. So on a relative basis, Germany’s productive and second only to Spain in this sample (notably Spain gained a whopping 4.1%!). (Also, please see Chart 18 of this ECB research paper for a broader comparison – it’s a .pdf file).

Exhibit 2: Despite the relatively weak productivity gains, albeit positive I remind you, the standard of living has increased in line with other Eurozone economies, like France, and surpassed others, like Italy.

This chart, to me, illustrates that productivity gains have been ‘competitive’ enough to support decent growth in the average standard of living (as measured by real per-capita GDP from the IMF).

And to really hammer down the point, please see page 24 in a recent ECB research report, Chart 18 referenced above, on the impact of the global recession on Euro area competitiveness. Germany’s 2000-2008 annual average productivity gains are in line with many other European economy, but wage compensation is relatively muted. In fact, German average annual compensation per employee is the lowest of the cross-section (according to Chart 18). My point is, that productivity gains were not fully passed on to workers via nominal compensation gains (probably a better comparison would be real compensation per employee).

Exhibit 3: It’s all about levels; and Germany’s 2010 average income is relatively high (measured in GDP per-capita PPP dollars for comparability across exchange rate regimes).


The German standard of living (i.e., relative per-capita GDP) fairs well against a cross-section of developed economies in Europe and abroad. Average income (standard of living) is the fourth highest behind Norway (for comparison to Kantoos’ article), the US, and Canada. Italy runs low current account deficits (trade is pretty well balanced), and average income falls at the bottom of this sample. That’s very uncompetitive in the relative sense.

The second issue that I mentioned is measurement – i.e., there’s a problem with using just unit labor costs to measure ‘competitiveness’ (see a recent Naked Capitalism article to the point).

However, no matter how you look at relative prices – the real exchange rate, relative export prices, relative unit labor costs, relative GDP deflators, etc. – Germany stands out as very ‘competitive’, or at least ‘exportable’. I have no direct chart to support my previous statement; but the European Commission does. The EC publishes a quarterly report on price and cost competitiveness; and according to the most recent report, 2Q 2010 (.pdf), Germany is very competitive by any measure of relative prices(see pages 15-16 of the .pdf).

In conclusion, it’s difficult for me to see how Germany is not ‘competitive’ on a relative basis, if ‘competitive’ is either (1) standard of living and relative productivity gains, or (2) in a relative prices sense.

I would state here that within the Eurozone, a healthy rebalancing of current accounts is underway (i.e., typical creditors dissaving and typical debtors saving). This would be made much easier if the ECB would run looser policy and allow German inflation to overshoot, effectively facilitating the relative price adjustements. Please see David Beckworth’s article to this point.

Rebecca Wilder

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