Since the introduction of the euro at the beginning of 1999, the European Central Bank calculates that Germany has gained competitiveness, not only against other major industrial nations but against all other members of the euro zone.
Over the same period, Germany’s balance of payments has gone from a small deficit to a strong surplus, but in the euro zone as a whole the balance of payments position has deteriorated slightly. Trade balances are the largest part of the balance of payments, but other transfers — not including international investments and profits from those investments — are also included.
The loss of competitiveness has been a major problem for some other members of the euro zone, most notably Greece and Ireland, each of which has been bailed out by Europe. Portugal, the other country to seek help, has suffered a smaller loss of competitiveness.
Ireland’s problems were caused largely by the collapse of its banking system, which stemmed from the collapse of a property boom that had been propelled by cheap credit and tax incentives. The loss of competitiveness was not as much of a problem for Ireland as it was for Greece and Portugal.
After the collapse, Ireland embarked on a harsh program of austerity, including wage cuts, and both its competitiveness and its balance of payments have improved.
The competitiveness measure is based on currency movements and changes in unit labor costs in major industrialized countries. German competitiveness against the rest of the world was probably helped by the fact that the relatively poor performance of other members of the euro zone held down the appreciation of the euro against other currencies.
The first set of charts accompanying this article shows Germany’s performance in competitiveness, as well as the country’s balance of payments as a percentage of gross domestic product. The next set of charts shows similar measures for the other major countries of the euro zone, France, Italy and Spain. The final set shows the performance of the three countries that were forced to seek European help.
The European Central Bank does not publish a competitiveness index for Portugal based on unit labor costs, so a similar one based on overall inflation in the economy is used instead. Greek balance of payments data is not available for 1999.
With the exception of Germany, each of the countries shown has lost competitiveness because unit labor costs have risen more rapidly in those countries. Absent the euro, many of the countries probably would have devalued their national currencies, but that is not possible as long as they remain in the euro zone.
Since the financial crisis intensified in mid-2008, all of the countries, including Germany, have improved their global competitive positions. Ireland has improved its position more than any other country in the euro zone, but both Greece and Portugal have continued to lose ground to Germany.
Floyd Norris comments on finance and the economy in his blog at nytimes.com/norris.
Floyd Norris comments on finance and the economy in his blog at nytimes.com/norris.
Article source: http://feeds.nytimes.com/click.phdo?i=91f180bd84f5971e5e535da35a42f172
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