by
Thanos Skouras*
Despite the widespread use of the notion of a country’s competitiveness in public policy discussion and the regular compilation of an international competitiveness index by at least two separate institutions, there is a certain reluctance among academic economists in accepting the coherence and legitimacy of the concept.
The reason is that it makes an odd fit with the economic theory of international trade. It is closely associated with mercantilism and, from Adam Smith onward, economics has consistently rejected mercantilism and the ‘beggar thy neighbor’ stance to which it leads, as an acceptable norm of economic policy.
It is, nevertheless, possible to salvage the competitiveness notion by distinguishing its useful integral part, which relates to comparative productivity and the intrinsic developmental potential of an economy, from its shady part, which is associated with exploitative mercantilism. For this reason, a distinction is made between ‘essential’ competitiveness and ‘apparent’ competitiveness.
‘Essential’ competitiveness is analogous to its usage in microeconomics, where it denotes firms’ relative ability to compete, and refers mainly to sales cost (including production, finance and marketing costs) but also to other elements, such as product characteristics (including quality, reputation and image), distribution networks, accessibility to markets and any other factor that contributes to a firm’s ability to achieve sustained profitability and do consistently better than its rivals.
In the case of a country, in addition to the above, it includes monetary and fiscal policy, as well as other macroeconomic policies and conditions, such as a minimum wage or incomes policy or even prospects regarding political developments, which can have an effect on the level of prices and in the financing conditions and borrowing rates. It also includes institutional elements, such as the quality and performance of the education system, the legal system, labor relations and the functioning of the labor market, market structure and the degree of monopoly, as well as any other institution that contributes to the country’s better economic performance relative to other countries sharing the same currency (or having a long‐standing stable exchange rate).
In contrast, ‘apparent’ competitiveness refers to the ability of a country to compete in international markets with countries that do not share its currency, which depends not only on its ‘essential’ competitiveness but also, quite crucially, on the exchange rate. A change in ‘essential’ competitiveness tends to affect the exchange rate in a way that causes the ‘apparent’ competitiveness to move in the opposite direction, so that the balance of payments is, at least roughly and over time, in equilibrium.
But this is not the case among member countries within a monetary union. A change in ‘essential’ competitiveness of a member country (or a difference from the average ‘essential’ competitiveness of the union as a whole) cannot be counterbalanced by a change in its exchange rate, since the member countries of the monetary union share a common currency. Moreover, the change or difference in, ‘essential’ competitiveness of a member country has generally limited effect on the union’s exchange rate vis a vis the rest of the world, since this is determined by the weighted average ‘essential’ competitiveness of the union as a whole. As a result, any change (or difference) in the ‘essential’ competitiveness of a member country within a monetary union is leveraged, in comparison to the outcome of the same change (or difference) if the country were not a member or were to leave the currency union.
An analogy from the world of competitive sports may be instructive. The handicap system used in diverse sports, such as golf or horse races, is analogous to the counterbalancing movement of the exchange rate following a change in a country’s ‘essential’ competitiveness. For example, according to horses’ relative performance in training and in previous races, they are saddled with different weights, so as to equalize the chances across all horses competing in a race. In this setting, a currency union is like grouping the horses of a stable together and assigning a single common handicap to all of them, on the basis of their average performance.
Such an arrangement, would obviously grant the best performing horses of the stable an unfair advantage and, by the same token, disadvantage the worst performing ones when competing with other horses, which have been given a handicap based on their individual performance.
The leveraging of ‘essential’ competitiveness by the Eurozone may account to a considerable degree for the German economy’ s superior recent performance. Germany had from the start a relatively high ‘essential’ competitiveness and strove to augment it, not least through an unpopular wide-ranging reform of the labor market. Irrespective of the arguable effectiveness of this reform in raising competitiveness, there is no question that Germany managed to preserve its ‘essential’ competitiveness and, with the help of its leveraging, to overcome the 2008 international financial crisis and establish herself today as the undisputed leading economic power in Europe.
Evidently, the mirror image of Germany’s enhancement of competitiveness is found in the southern European countries, the competitiveness of which is lower than the Eurozone’s weighted average and is, therefore, negatively leveraged. Their travails result perversely in a further gain for Germany. Uncertainty about the robustness of their economies, state finances and, especially, their banks have caused capital to move to Germany in search of greater security.
In particular, the prospect of Greece leaving the eurozone and the potential domino effect of Grexit, greatly augmented the desirability of German bunds as a safe haven for southern Europe’s jittery capital. An empirical study by the Leibniz‐Institut für Wirtschaftsforschung Halle, a German research institute, estimates that the benefit to the German state from lower borrowing costs, due to the fear of Grexit, easily exceeds the total contribution by the German Treasury to Greece’s rescue from bankruptcy. The total benefit to the German economy is bigger, if account is taken of the addition to the strained German labor force of a considerable number of well-trained immigrants, such as medical doctors, engineers and other professionals, in search of better employment opportunities and a more secure future, not only from Greece but also from the other southern countries. Both these benefits reinforce Germany’s ‘essential’ competitiveness and, at the same time, weaken further the ‘essential’ competitiveness of the southern countries.
Finally, uncertainty presents a boon to the German economy through another channel, by also increasing ‘apparent’ competitiveness. The total benefit is thus even greater, though no doubt unevenly shared (with some parts of the German public loosing out). Germany’s total gain is further enhanced by any hanging uncertainty regarding a weaker country’s ability for continued stay in the Eurozone. Similarly to the Greek crisis, any threat of a future departure by a weaker member will tend to lower the euro. But a lower euro increases the Eurozone’s “apparent” competitiveness and thus boosts the export performance of all member countries but more so that of Germany, which accounts for the largest share of the Eurozone’s exports. Consequently, the preservation of uncertainty, though clearly damaging to the ‘essential’ competitiveness and developmental prospects of the southern countries, serves as a significant source of gain to the German economy by increasing both its ‘essential’ and ‘apparent’ competitiveness.
*Emeritus Professor - Athens University of Economics and Business
By: N. Peter Kramer
