Europe is trapped by its competitiveness obsession
While European external surpluses are accumulating and domestic demand is slacking, insisting on improving the Union’s external competitiveness, as some in the Commission are presently doing, is paradoxical. For Europe, the paramount risk is not losing its competitiveness. It is not recovering cohesion and growth.
By Sébastien Jean
Post
For policy makers, competitiveness easily becomes a “dangerous obsession”, to paraphrase Paul Krugman. By declaring that “Europe is on the verge of losing its competitiveness” (Le Monde, 26 March 2015), Europe Commissioner for industry, Elzbieta Bienkowska, offers a new blatant illustration of this tendency. Emphasizing the need to “show that Europe may be competitive when faced with the United States, China, South America and South-East Asia” may seem meaningful; as a matter of fact, it is paradoxical, if not counterproductive. Euro area’s export performances during the last two decades have been far better than those of the United States or Japan, for instance, included in emerging markets. True, Germany made a disproportionate contribution to this outcome, but it is not alone. In 2014, 21 out of 28 EU’s Member States exhibited a current account surplus. 14 out of 18 euro area members were in this situation –with France as the most notable exception.
If Europe is a problem to the world economy, it is on the contrary due to its surpluses. The euro area as a whole exhibited last year a current account surplus worth approximately €250 Bn, or around 2.5% of its GDP. As a proportion of world GDP, this surplus was close to 0.5%, approaching the records set by China in 2008 and by Japan in the mid-eighties. The euro’s fall –it depreciated by almost 15% in a year compared to the average of the area’s trading partner–, combined with falling oil prices, pave the way for a even higher surplus in 2015, which may set a new world record. For an ageing region, saving may sound like a wise precaution. For this to be the case, though, its partners must be able to get into debt in due proportion while sustaining the ensuing future obligations. And this saving must not be obtained at the expense of investments needed to grow. The European industry’s capacity to innovate and improve the quality and efficiency of its production is clearly essential for growth. From a macroeconomic standpoint, however, the present external surplus reflects excess savings with respect to investment, essentially as a result of the latter slackness.
This obsession about Europe external competitiveness is worrisome because it is symptomatic of the asymmetry prevailing when dealing with macroeconomic disequilibria. The meaningful concern about competitiveness in Europe presently does not concern the area as a whole, but rather the relative performances of its member countries, especially within the euro area, where exchange rate adjustments are impossible. It is not about aggregate trade performance, but rather about internal adjustments. The focus should be on balancing savings and investment within each economy, and prices and wages across member countries.
The qualification is not only a semantic one. It involves a different sharing of burden, where required competitiveness improvements in deficit countries can be mirrored by rebalancing in surplus ones, either through investment initiatives, higher wage increases or well-suited evolutions of taxation. These dimensions are part of the recommendations spelt out by the European Commission to Germany to “prevent and correct macroeconomic imbalances”. By putting excessive emphasis on competitiveness concerns, though, the Commission blurs this message and feeds the de facto asymmetry of internal adjustments within the euro zone, which so far overwhelmingly relied upon deficit countries. At risk is a mercantilist escalation which does not benefit anyone, since efforts in one country defeat those in another. It results in ever increasing surpluses with regard to the rest of the world, with potentially destabilizing consequences for the world economy, commercially as well as financially: our partners will not indefinitely accept export being used as outlets for our internal misadjustments. Internally, it feeds demand slackness and deflationary forces. The Commission has an important role to play to whistle the end of this mercantilist brawl and entice everybody in contributing to required adjustments. There is no denying competitiveness should be improved in France, inter alia. But presenting external competitiveness improvement for the whole European Union –or for that matter the euro area– as a priority does not contribute to this adjustment. On the contrary, it stifles it. For Europe, the paramount risk is not losing its competitiveness. It is not recovering cohesion and growth.
If Europe is a problem to the world economy, it is on the contrary due to its surpluses. The euro area as a whole exhibited last year a current account surplus worth approximately €250 Bn, or around 2.5% of its GDP. As a proportion of world GDP, this surplus was close to 0.5%, approaching the records set by China in 2008 and by Japan in the mid-eighties. The euro’s fall –it depreciated by almost 15% in a year compared to the average of the area’s trading partner–, combined with falling oil prices, pave the way for a even higher surplus in 2015, which may set a new world record. For an ageing region, saving may sound like a wise precaution. For this to be the case, though, its partners must be able to get into debt in due proportion while sustaining the ensuing future obligations. And this saving must not be obtained at the expense of investments needed to grow. The European industry’s capacity to innovate and improve the quality and efficiency of its production is clearly essential for growth. From a macroeconomic standpoint, however, the present external surplus reflects excess savings with respect to investment, essentially as a result of the latter slackness.
This obsession about Europe external competitiveness is worrisome because it is symptomatic of the asymmetry prevailing when dealing with macroeconomic disequilibria. The meaningful concern about competitiveness in Europe presently does not concern the area as a whole, but rather the relative performances of its member countries, especially within the euro area, where exchange rate adjustments are impossible. It is not about aggregate trade performance, but rather about internal adjustments. The focus should be on balancing savings and investment within each economy, and prices and wages across member countries.
The qualification is not only a semantic one. It involves a different sharing of burden, where required competitiveness improvements in deficit countries can be mirrored by rebalancing in surplus ones, either through investment initiatives, higher wage increases or well-suited evolutions of taxation. These dimensions are part of the recommendations spelt out by the European Commission to Germany to “prevent and correct macroeconomic imbalances”. By putting excessive emphasis on competitiveness concerns, though, the Commission blurs this message and feeds the de facto asymmetry of internal adjustments within the euro zone, which so far overwhelmingly relied upon deficit countries. At risk is a mercantilist escalation which does not benefit anyone, since efforts in one country defeat those in another. It results in ever increasing surpluses with regard to the rest of the world, with potentially destabilizing consequences for the world economy, commercially as well as financially: our partners will not indefinitely accept export being used as outlets for our internal misadjustments. Internally, it feeds demand slackness and deflationary forces. The Commission has an important role to play to whistle the end of this mercantilist brawl and entice everybody in contributing to required adjustments. There is no denying competitiveness should be improved in France, inter alia. But presenting external competitiveness improvement for the whole European Union –or for that matter the euro area– as a priority does not contribute to this adjustment. On the contrary, it stifles it. For Europe, the paramount risk is not losing its competitiveness. It is not recovering cohesion and growth.
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