Germany Is Competitive On A Relative Basis Whether It's Productivity, Standard Of Living, Or Prices

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.
(read much more after the jump!)

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 – 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.

chart


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, only second 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 Eurozone economies, like France, and surpassed others, like Italy.

chart

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

to really hammer down 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 productivity gains are in line with many others, but wage compensation is relatively muted. In fact, average annual compensation per employee in Germany is the lowest, 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).

chart


The German standard of living (i.e., relative per-capita GDP) fairs 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 US, 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 labour 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 labour 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. 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’ as either (1) standard of living and relative productivity gains, or (2) in a relative prices sense.

Rebecca Wilder
P.S. I have one more thing to say about competitiveness in Ireland; but I’ll leave that for another post.

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