Going beyond the mystery of Italy’s price-competitiveness indicators
Claire Giordano, Francesco Zollino, 18 July 2013
Since the mid-2000s competitiveness indicators for Italy have been providing conflicting signals. This column argues that producer prices and labour costs have actually moved hand in hand since 1992, and that the rise in the real effective exchange rate based on labour costs can be attributed to price-cost divergences in its main trading partners. Due to the internationalisation of production processes and fading share of labour in overall costs, price-based indicators may be more appropriate to assess external competitiveness.
Assessing Italy’s price competitiveness is becoming a puzzling challenge. Among others, Paul Krugman (2012) has questioned the reliability of the Italian cost-based indicators pinpointing their links with the “[country’s] mysterious productivity collapse”. Bayoumi et al.
Topics: Exchange rates, International trade
Tags: competitiveness, economic indicators, Italy
The roots of the Italian stagnation
Paolo Manasse, 19 June 2013
It’s currently very trendy in Italy to blame Angela Merkel, Mario Monti, and austerity measures for the current recession. This column argues that while the severity of the downturn is clearly a cyclical phenomenon, the inability of the country to grow out of it is the legacy of more than a decade of a lack of reforms in credit, product and labour markets. This lack of reform has suffocated innovation and productivity growth, resulting in wage dynamics that are completely decoupled from labour productivity and demand conditions.
Italy is currently facing its worst recession in recent history, having lost about 8.5% of GDP between 2007 and 2013. The current situation is, to a large extent, the result of the Eurozone crisis and of the tough fiscal-austerity measures introduced across Europe, and particularly in Italy.
Topics: Europe's nations and regions
Tags: competitiveness, Eurozone crisis, Italy
Hans-Werner Sinn, Akos Valentinyi, 9 March 2013
Will addressing large internal imbalances lead us out of the Eurozone crisis? This column argues that it might. Periphery countries should devalue in order to regain competitiveness and reduce imbalances. As to whether they should pursue internal or external devaluation, the answer remains unclear. Overall, given that policymakers have excluded the option of exit, economic policymaking must focus on the possibilities for internal devaluations, despite some of the difficulties it may bring.
Europe is in the grip of three interrelated crises: a balance-of-payments crisis, a sovereign-debt crisis and a banking crisis. Policymakers have primarily focused on the sovereign-debt and banking crises. However, a credible strategy for getting the Eurozone back on track needs to address the problem of its large internal imbalances.
Topics: Europe's nations and regions
Tags: competitiveness, devaluation, Eurozone crisis, imbalances
The Brazilian competitiveness cliff
Otaviano Canuto, Matheus Cavallari, José Guilherme Reis, 27 February 2013
Brazilian exports of goods and services have grown sharply in recent years, tripling since 2000. This column argues that Brazil’s export performance depends mostly on favourable geographical and sector composition effects and that a recent slowdown in industrial exports, production, and investments are not related to insufficient demand but rather supply-side inefficiencies and rising costs. Policymakers ought to aim for urgent progress on the nation’s microeconomic reforms agenda, an increase in the investment-to-GDP ratio, and improvements in human capital.
The Brazilian economy is facing considerable competitiveness challenges (Bonelli and Pinheiro 2012). After several years of strong expansion, the recent slowdown seems related to supply-side difficulties stemming from a wide range of inefficiencies and rising costs, rather than insufficient aggregate demand.
Topics: International trade, Monetary policy
Tags: BRICs, capital controls, competitiveness, MIST
Why do large movements in exchange rates have small effects on international prices?
Mary Amiti, Oleg Itskhoki, Jozef Konings, 19 February 2013
Why is it that large movements in exchange rates have small effects on international prices? What does this mean for a crisis-stricken Eurozone? Using firm-level data, this column presents new research that investigates this exchange rate ‘disconnect’. Evidence suggests that the prices of the largest firms – with their disproportionately large share of trade – are insulated from exchange rate movements. The international competitiveness effects of a euro devaluation are therefore likely to be modest, given major exporters’ reliance on global supply chains.
Exchange rate moves have surprisingly small effects on prices. This apparent ‘disconnect’ is one of the central puzzles in international macroeconomics. It is also a continual headache for policymakers who rely on exchange rates to accommodate the adjustment of global (current account) imbalances.
Topics: Exchange rates
Tags: competitiveness, euro, Eurozone crisis, exports, imports
Value-added exchange rates
Rudolfs Bems, Robert Johnson, 6 December 2012
With the rise of complex, globalised supply chains is the real effective exchange rate (REER), the most commonly used measure of competitiveness, now outdated? If it is, what should replace it? This column presents a ‘Value-Added REER’ and shows that it differs substantially from the conventional REER. Because it is possible to construct a new Value-Added REER from existing data, policymakers interested in improving their understanding of competitiveness might well consider including it in their toolbox.
Real effective exchange rates (REERs) are widely used to gauge competitiveness. Yet conventional REERs, based on gross trade flows and consumer price indexes (CPIs), are not well suited to that role when imports are used to produce exports – i.e., with vertical specialisation in trade.
Topics: Competition policy, Global economy, International trade
Tags: China, competitiveness, Germany, global imbalances, globalisation, iPhone, supply chains, trade
Export shares, price competitiveness and the ‘Spanish paradox’
Miguel Cardoso, Mónica Correa-López, Rafael Doménech, 24 November 2012
How can we explain the ‘Spanish paradox’ – a modest market share loss since the launch of the euro alongside a real exchange rate appreciation? This column argues that the non-price determinants of competitiveness have been more important than export prices in explaining the change of world exports shares. Notably, Spanish firms’ strategic decision-making has helped shape Spain´s internationalisation and may, ultimately, be the crucial factor explaining the paradox.
Since the launch of the euro, Spanish exporters have been successful in containing the loss of their export share in world markets. This is in contrast to several advanced economies that have experienced significant losses as a result of globalisation and the gain of exports shares by many emerging countries.
Topics: Europe's nations and regions, International trade
Tags: competitiveness, export market shares, Spain
Triggering competitiveness: A 'decalogue' from new firm-level evidence
Carlo Altomonte, Tommaso Aquilante, Gianmarco I.P. Ottaviano, 23 August 2012
Competitiveness is one of the most debated issues in policy circles. But, what triggers it? Capitalising on the first existing harmonised cross-country dataset measuring the entire range of international activities of firms in seven European countries, this column identifies the triggers of competitiveness. It argues that policymaking could be improved by firm-level evidence if there were less reluctance to the use of micro-founded indicators to inform policy decisions.
The ability to 'grow out' of the crisis is now widely recognised as the only viable long-term option for maintaining the Eurozone (Delbecque 2012), keeping the EU vibrant and assuring the sustainability of the European social-market-economy model.
Topics: International trade
Tags: competitiveness, firm-level, heterogeneous firms
Saving the euro requires restoring Spain’s competitiveness
Bernard Delbecque, 30 July 2012
The escalation of the crisis in the Eurozone calls for new measures to reduce yields on Spanish bonds. This column succinctly lays out the options and finds them wanting. It argues that sovereign bond purchases might not be sufficient to reassure investors. A credible solution will also require a coordinated strategy to address Spain’s competitiveness problem.
The Eurozone crisis has confirmed that a monetary union is more resistant to market pressures than a fixed exchange rate regime. This fact explains why policymakers have been able to muddle through the current crisis by producing compromises and gaining time.
Topics: EU policies
Tags: competitiveness, EZ crisis
Internal adjustment of the real exchange rate: Does it work?
Zsolt Darvas, 6 July 2012
The forefathers of Europe’s single currency argued that rather than devalue their currencies to restore competitiveness, countries could devalue ‘internally’. Against the current of bad press, this column presents a novel way of recording competitiveness and argues that Ireland, Spain, Latvia, and Lithuania have all managed these adjustments – but not without paying a huge toll in jobs lost.
There is an intense policy debate on ‘internal adjustment’, i.e. productivity improvements and wage cuts to restore price competitiveness, when depreciation of the nominal exchange rate is not available. The most frequently mentioned examples for internal adjustment are Ireland and the Baltic countries.
Topics: Europe's nations and regions, Productivity and Innovation
Tags: competitiveness, Eurozone crisis