11 November 2012

Wolfgang Münchau: Competitiveness will not save the euro

Last week a report by Louis Gallois, former chairman of EADS, suggested measures to render France more competitive. The report and the debate that came with it reflect a wider intellectual muddle about the nature of reforms. I detect a triple misdiagnosis – about the effects of reforms in Germany; about the kind of reforms that are now needed in France, and in Italy and Spain; and about the focus on competitiveness.

Why do we always focus on competitiveness? Businesspeople talk endlessly about it but it is a less useful concept on a macro-economic scale. It conflates two concepts: macro-economic competitiveness, as expressed by the real exchange rate, and total factor productivity, or TFP, a proxy for a country’s technological dynamism. A cut in unit labour costs is only a gain if you achieve it but nobody else does. Once you advocate it as a policy for everyone in the eurozone, you end up in a zero-sum game. We cannot all devalue at the same time. If we are saying that the eurozone should reduce unit labour costs to the level of Germany, why do we think that Germany will not do the same?

So that leaves TFP. This would be fine, but then it would be better to focus on it specifically, rather than through the distraction of the nebulous concept of competitiveness. Furthermore, we may not know as much about TFP as we think.

Specific reforms can be useful, but nobody should fool themselves that structural reforms could solve what is ultimately a balance-of-payments crisis. You have to resolve this crisis first – rather than seek refuge in the age-old debate Europeans love to waste their time with: on institutional reforms and structural reforms. They are both not irrelevant, but they are irrelevant to the resolution of this crisis.

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