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By Rebecca Wilder

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.

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 -- where 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.

[Click all to enlarge]

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 euro zone 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 home 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 economies, 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) fares 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 U.S., 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) measured by standard of living and relative productivity gains, or (2) in a relative prices sense.

I would state here that within the euro zone, 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.

Source: Considering Germany's Competitiveness on a Relative Basis