The Wilder View

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 95.8% 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.

4 Responses to “This ‘Competitiveness’ Thing Is a Scam”

mi422September 29th, 2011 at 11:52 pm

Schäuble is a politician and when he uses competitiveness in that context, this mostly means labor and welfare state "reforms". And this is not any new, only just the same he said all his long years as a politician. (he is not a moderate in the CDU, far from it)
But it could be only "tough talk", because IF the Euro really would fall apart, not only the balance sheets of german bank would be in trouble, but the balance sheets of all big german non-bank firms also would have problems, due to the assets in other Euro countries they have. (ironically banks and non-bank balance sheets of companies outside germany which have assets in germany would therefore in principle benefit from a Euro exit if their new souverein currency would plunge, but this is only a theoretical benefit)
The main question is how he (and others) thinks Italy (and Spain) can increase their tax revenues, where their future growth should come from.
If it becomes clear that the austerity-is-the-solution is wishful thinking the disaster Nouriel Rubini talks about in his latest comments could be reality.

Ed Dolan EdDolanSeptember 30th, 2011 at 5:58 am

Your post makes some very good points. There is a paradox about the professed German desire to make other euro countries more like Germany: Germany's own competitiveness, in the sense of the OECD definition you site, not the World Economic Forum definition, improves when the euro is relatively weak. If other countries became more competitive in the WEF sense, then the euro would appreciate, and Germany would be less competitive in the OECD sense. I was trying to make that point a week or so ago when I wrote about how Germany free-rides on the euro (… ). I see now that I could have improved my argument by drawing on your two contrasting concepts of competitiveness.

JimPivonka1October 7th, 2011 at 12:48 pm

I'd like to see what Rebecca Wilder, Ed Dolan, and Schoder, Proano, & Semmler would come up with if they got together and nailed this one's hide to the wall.

Considering the extent of control over the fates of other Euro countries being exercised by Germany – the German financial sector, really – and the consequences for those other countries' economies, cultures, social relations and political stability, such an effort would seem worthwhile.

And having the news out there, in coherent form, might discipline some German political figures who have been pretty aggressive in placing all of the responsibility for the current problems on "the periphery" and could be seen as actively seeking the forced Germanicization of Europe.

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