Factoid of the day 22/5/2012. Diminishing German competitiveness?
Update More thorough on this: JW Mason on The Slack Wire
Are trade imbalances in the EU due to differences in productivity and sluggish development in countries like Spain and Greece? I doubt it. After 2007 the German intra EU trade surplus (goods) diminished from 127 billion Euro to 54 billion Euro. Does this indicate diminished German productivity and competitiveness? Of course not. It was largely caused by the severe crisis in Southern Europe, which caused a decline of southern european imports. Before 2007, southern Europe of course saw its deficits increase – mainly because of rising imports, not so much because of declining exports. Spanish exports in fact increased faster than German exports! But in the case of Italy probably also because of sluggish development. Contrary to Spain and Greece, where productivity increased as fast or even faster than the EU average (and, as German productivity decreased vis-a-vis the EU average, quite a bit faster than in Germany), Italy witnessed a sharp and unprecedented deterioration of its relative productivity. But the Italian trade deficit in fact stayed quite limited… Trade deficits are also caused by high aggregate demand, not just by low competitiveness. It might by the way well be that the intra-european current account of southern Europe, which includes services (tourism), shows a surplus!
Southern Europe however still has a large goods deficit with ‘the rest of the world’. But should we cure this by lowering nominal wages or by increasing excises on energy and using this money to lower VAT on labour intensive services and to finance investments in durable energy?