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The Competitiveness Debate(s)

What’s at stake On both sides of the Atlantic, a fierce debate on competitiveness is taking place. Although the European debate about the “Pact for Competitiveness” is broader and more centred on internal governance issues than the American debate on “Winning the Future”, in both regions policymakers seem to assume that their countries will be […]

By: Date: March 4, 2011 Topic: European Macroeconomics & Governance

What’s at stake

On both sides of the Atlantic, a fierce debate on competitiveness is taking place. Although the European debate about the “Pact for Competitiveness” is broader and more centred on internal governance issues than the American debate on “Winning the Future”, in both regions policymakers seem to assume that their countries will be able to export their way out of trouble. Too bad there has been new signs of life on Mars.

The European debate

What’s at stake:In view of the cold reception of the Franco-German Pact for Competitiveness presented on February 4, EU Commission President Jose Manuel Barroso and European Council President Herman van Rompuy have drafted a compromise package that includes many of the original proposals although with more room for national adaptations. Previously, German Chancellor Angela Merkel and French President Nicolas Sarkozy advanced a "Pact for Competitiveness," aimed at eliminating economic imbalances and differences in competitiveness within the eurozone as well as enshrining fiscal discipline in national legislations.

The FT Brussels blog
published a draft of the "Enhanced Economic Policy Coordination" compromise that was circulated to the 17 eurozone “sherpas”. The plan foresees measures in the areas of competitiveness, wage and productivity dynamics, pensions, and public finances. The key difference between the pacts is that the new plan uses the EU’s Brussels-based bureaucracy to administer the pact (the German plan was originally coordinated in national capitals) and sands off some of the sharper edges of the German proposal – including dropping the requirement for coordinated corporate taxes, a particularly contentious issue in low-tax Ireland.

Charles Wyplosz says that Merkel and Sarkozy seem to have adopted the view that the problem in the euro area lies with competitiveness. This is a popular story, which runs as follows. Excessive labour costs mean that some countries are unable to grow. Caught in such a situation, countries with their own exchange rates, normally recover competitiveness and dynamism through depreciation. This avenue is closed for Euro Area member countries. An aggravating factor is that poor economic growth makes it politically difficult, if not impossible, to sustain budgetary retrenchment, which means that the public debt crisis is not going to go away as long as competitiveness is not restored. This is a scary story, but it is misleading in many ways (see below).

Guy Verhofstadt, Jacques Delors and Romano Prodi argues that instead of the competitiveness pact, EU leaders should adopt a “Community Act” for economic convergence and governance. This would aim to push forward in the most vital economic fields where closer alignment and co-ordination is needed. These should include pension reform, wage levels, corporate taxation rates, research and development, and investment in transport, telecommunications and energy infrastructure. The EU must get a grip on the issue of economic governance. It is not solely a matter of restoring liquidity and confidence in the banking sector, but of laying the foundations for a new economic model that will give Europe a global competitive edge.

Colm McCarthy writes in the Irish Independent that the European economies have not been experiencing the worst recession since the Second World War because the retirement age is too low, or because there are national differences in corporation tax rates. Ireland is not in an IMF bailout because the budget deficit, in the years before the crisis, was outside the Eurozone parameters. This is a banking crisis and it remains unresolved three years after the bubble began to burst. Eurointelligence makes the same point and for that reason writes that the whole plan should be vetoed. This was a crisis of an excessive built-up of private sector debt in the presence of poorly capitalised banking systems with fragmented regulation. Eurointelligence also notes the competitiveness proposals – where a monitoring system for wage and productivity levels would force countries to lower employment costs if they rose to quickly – are highly asymmetric: this pact is design to impose German economic conditions on other countries.

Charles Wyplosz challenges the conventional diagnosis of internal divergence within the eurozone. We have been presented with the same data over and again: since 1999 when the euro was introduced, unit labor costs have risen by 25% to 30% relative to Germany in Greece, Spain, Portugal and Italy. First, we know that Germany mistakenly converted deutschemarks into euros at an inflated value, thereby knocking off its competitiveness. Wage moderation was needed and impressively achieved over the first decade of the euro. So, yes, German unit labor costs have increased much less than in the rest in the Euro Area. But that does not mean that anything wrong occurred outside of Germany. Second, Greece trades with many countries, inside and outside of the Euro Area, not just Germany. When compared to a relevant set of countries Greek labor costs have only risen by 9%, which is not negligible, but not dramatic either. A more subtle argument is that Greece, along with other countries, must become supercompetitive to grow through exports and, without an exchange rate of its own, it must either cut wages or boost productivity. The argument is correct, but of limited practical relevance since cutting wages by 15 to 30% is political suicide and productivity normally rises by 2 to 3%.

The American debate

What’s at stake:President Obama has also decided to make competitiveness his economic theme and named GE CEO Jeff Immelt to head up what used to be the President Economic Recovery Advisory Board and has now been renamed the Council on Jobs and Competitiveness to help find ways to grow the economy by investing in American businesses.

Barack Obama
said in his weekly address on 22 January that he wants to attract the best jobs and businesses to America rather than seeing them spring up overseas. We’re living in a new and challenging time, in which technology has made competition easier and fiercer than ever before. Countries around the world are upping their game and giving their workers and companies every advantage possible. But that shouldn’t discourage us. Because I know we can win that competition. I know we can out-compete any other nation on Earth.

Paul Krugman
writes that this is hackneyed stuff, and involves a fundamental misconception about the nature of our economic problems. It’s OK to talk about competitiveness when you’re specifically asking whether a country’s exports and import-competing industries have low enough costs to sell stuff in competition with rivals in other countries. But the idea that broader economic performance is about being better than other countries at something or other – that a country is like a corporation – is just wrong. In his NYT column, Krugman argues further that it’s true that we’d have more jobs if we exported more and imported less. But ultimately, we’re in a mess because we had a financial crisis, not because American companies have lost their ability to compete with foreign rivals.

Robert Reich
argues that although it’s politically important for President Obama to be available to American business, and to avoid the moniker of being “anti-business”, the President must not be seduced into believing — and must not allow the public to be similarly seduced into thinking — that the well-being of American business is synonymous with the well-being of Americans. Mark Thoma argues that the notion of competitiveness – and the idea that since businesses create jobs, anything good for business is good for workers – will undoubtedly turn into a call to cut business taxes to enhance competitiveness and spur economic growth.

Greg Mankiw
argues that not only does the pesky abbreviated form of the phrase winning the future does not exactly inspire confidence, it misleads us about the nature of the policy choices ahead. Achieving
economic prosperity is not like winning a game, and guiding an economy is not like managing a sports team. Other nations are best viewed not as our competitors but as our trading partners. Partners are to be welcomed, not feared. As a general matter, their prosperity does not come at our expense.

Stephen Williamson
writes that it seems like what Jeffrey Immelt has in mind is subsidizing the production of refrigerators in the US. He quotes this Washington Post piece where Immelt writes that “the assumption made by many that the United States could transition from a technology-based, export-oriented economic powerhouse to a services-led, consumption-based economy without any serious loss of jobs, prosperity or prestige was fundamentally wrong.” That being successful as producers of tangibles rather than intangibles is a good thing, and that we need government intervention to reverse the long-run shift from manufacturing to services is quite wrongheaded. Hopefully Obama will use this Council only to cozy up to the business community, and no legislation will result.

Real Time Economics
has a nice piece originally published in 1992 that traces the origin of the idea of competitiveness in DC.

Bruegel Economic Blogs Review is an information service that surveys external blogs. It does not survey Bruegel’s own publications, nor does it include comments by Bruegel authors.


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