Home > Uncategorized > Factoid of the day 22/5/2012. Diminishing German competitiveness?

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?

  1. henry1941
    May 22, 2012 at 7:19 am

    An unpublished document I was sent a few years ago showed that productivity is inversely proportional to the distance from Frankfurt. All the author did was to use the OECD figures and put them on a spreadsheet, then plot a graph. Scandinavia is an exception but only slightly.

    Within Britain, productivity falls off within the UK regions in the same way, the critical point in this case being somewhere around Milton Keynes.

    Anyone can show this using published figures. What is the explanation? Mostly it has to do with transport costs from the main centres of population. The centroid of population for the European region is near Frankfurt.

    Exactly the same effect can be seen in any city. Even street beggars understand it – they go where there are most people, not out at the edge where nobody goes.

    The implications are first, that the economies at marginal locations will always be weak and will never catch up unless there is a fundamental change in the nature of the economy which would alter everything; and second, that within a political entity, a means has to be devised for redistributing the wealth produced. If this is not done, then that entity will eventually fly apart due to “centrifugal forces”.

    Traditionally, this was done through regional development grants and structural funds, but they are inefficient and encourage corruption. It should also not be forgotten that peripheral areas are expected to make a contribution to the whole, through the tax system. In that the grants and assistance merely return money that was taken out previously, the logical question that then arises is why take it out in the first place? Why not redesign the tax system so that it takes account of geographical advantage and disadvantage?

    • johnberk
      May 22, 2012 at 6:32 pm

      Henry your analogy is perfect. This is exactly the same thing that was commented in one of the books about real estate named Real Estate Principles for the New Economy. It says the same. To invest in the outskirts of any town, province or state is not a good idea. Another great critique was Fernando Cardoso with his concept of periphery and center. The analogy with the beggars is obvious.
      The main question is whether to substitute their position or not? As you point out, investing money means further encouraging corruption, clientelism and patronage. Here I do believe some national concepts play its role.

  2. Barry Moore
    May 22, 2012 at 10:46 am

    Almost certainly the worsening German trade balance of Germany and the improving balance of Greece, Spain et al is the result of the slowdown in the latter countries rate of economic growth and aggregate demand, To measure the impact of changes in competitiveness it would be necessary to normalise the trade balance for changes in the growth rate.

  3. robert r locke
    May 23, 2012 at 1:17 pm

    i don’t understand this logic. If we look at demographic growth projections 2011 to 2035 in Europe the periphery states from Germany are doiing well. Spain pop to grow 13.37 %, Italy. 2.26%, Greece 2.16% France, 9.32% in this time period. Gemany’s population to decline -3.18% in this period, Poland -5.89%, Latvia, -11.60, -Lihuania -7.61%. It looks like the population growth divide is east-west not north-south and that the periphery states are doing well, except for Eastern Europe. With Germany and Eastern Europe projected demographic decline and Southern Europe and the UK significant growth, where is the core dynamism centered on Frankfurt.

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