Blog Post

Germany’s super competitiveness: A helping hand from Eastern Europe

Discussions about the current-account imbalance within the Eurozone have focused on the under-competitive periphery and super-competitive Germany. This column suggests that the argument ignores one powerful way that Germany lowered its relative unit labour costs. German firms offshored parts of their production to the new member states in Eastern Europe, Russia, and the Ukraine. Discussions […]

By: Date: June 19, 2010 Topic: Innovation & Competition Policy

Discussions about the current-account imbalance within the Eurozone have focused on the under-competitive periphery and super-competitive Germany. This column suggests that the argument ignores one powerful way that Germany lowered its relative unit labour costs. German firms offshored parts of their production to the new member states in Eastern Europe, Russia, and the Ukraine.

Discussions about the current-account imbalance within the Eurozone have focused on the under-competitive periphery and super-competitive Germany. This column suggests that the argument ignores one powerful way that Germany lowered its relative unit labour costs. German firms offshored parts of their production to the new member states in Eastern Europe, Russia, and the Ukraine.
Germany‟s substantial trade surplus with its southern neighbours is in the spotlight (Wyplosz 2010). Many economists argue that Germany‟s trade imbalance with its southern Eurozone neighbours has contributed to their woes. German industry has boosted the competitiveness of its exports over the past decade by keeping wages flat.
As a result, German wage restraint has led to a real depreciation of Germany‟s fixed nominal exchange rate vis-à-vis its Eurozone members, helping Germany to win market shares at the expense of Southern Europe. The numbers give support to this argument. In fact, Germany‟s real effective devaluation in terms of relative unit labour costs compared with the EU27 during 1994-2009 is about 20%. This is indeed substantial.
But the argument hides another powerful way by which Germany lowered its relative unit labour costs. German firms‟ offshored part of production to the new member states in Eastern Europe, Russia and Ukraine.
At first, Germany was slow in exploiting the opportunities offered by the opening up of Eastern Europe after the fall of communism compared to its neighbour, Austria. In 1999 Austria‟s outgoing foreign direct investment to Eastern Europe accounted for almost 90% of total investment leaving the country, Germany invested a meagre 4% in Eastern Europe. As a result, offshoring as measured by the share of trade between German parent firms and their subsidiaries in Eastern Europe – also called intra-firm trade – accounted for only about 20% of total German imports from Eastern Europe, while it reached almost 70% of total Austrian imports from the same region (Marin 2009).
In the second half of the 1990s Germany shifted its strategy and started to invest heavily in Eastern Europe. Its share of outgoing foreign investment to the region increased to almost 30% in 2004-2006.
This new way of organising production by slicing up the value chain has been more important for Germany‟s lower unit labour costs than German workers‟ wage restraint. According to estimates, German offshoring to Eastern Europe boosted not only the productivity of its subsidiaries in Eastern Europe by almost threefold compared to local firms, but it also increased the productivity of the parent companies in Germany by more than 20% (Hansen 2010 and Marin 2010).
As a result, relocating production to Eastern Europe made globally competing German firms leaner and more efficient helping them to win market shares in a growingly competitive world market. The efficiency gains from reorganising production were particularly pronounced after 2004 leading to a sharp fall in Germany‟s relative unit labour costs from 2004 to 2008.
Productivity gains from offshoring are also the main reasons why Germany and Austria experienced only minor job losses as a result of the opening up of Eastern Europe. By finding this new way of producing, German and Austrian firms were able to cut costs and to take advantage of the pool of skilled workers available there. It seems that the fall of communism and the opening up of Eastern Europe happened just at the right time. It allowed German firms to cut costs at the time when globalisation intensified competition and it allowed Germany to cope with the scarcity of human capital which became particularly pronounced in the 1990s.
Due to Germany‟s skill shortage, offshoring to Eastern Europe has led also to lower wages for skilled workers in Germany. German firms offshored the skill intensive part of the value chain to exploit the low cost skilled labour available in Eastern Europe. As a result, the demand for this type of labour in Germany was lower, putting downward pressure on skilled wages in Germany. Hence, offshoring improved Germany‟s competitiveness by increasing German firms‟ productivity and by lowering its skilled wages.
What follows from this for southern Europe?
Germany and Austria adjusted to eastern enlargement by changing the way they do business. It is often argued that the Eurozone‟s problem is that, contrary to the US, it lacks labour mobility and fiscal centralisation. But the evidence for Austria and Germany suggests that Europe has invented a new adjustment mechanism based on firms‟ slicing up of the value chain. As a result, while country boundaries have become less important for the competitiveness of Europe as a whole, firm boundaries are now more important.

References
Thorsten Hansen (2010), “Tariff Rates, Offshoring and Productivity: Evidence from German and Austrian Firm-Level Data”, Munich Discussion Paper 2010-21, University of Munich.
Dalia Marin (2009), “The New Corporation in Europe”, BRUEGEL Policy Brief, Brussels, September.
Dalia Marin (2010), “The Opening Up of Eastern Europe at 20: Jobs, Skills, and „Reverse Maquiladoras‟ in Austria and Germany”, Munich Discussion Paper 2010-14, University of Munich.
Wyplosz, Charles (2010), “Germany, current accounts and competitiveness”, VoxEU.org, 31 March.

A version of this op-ed was published by VOX.eu


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read about event More on this topic

Past Event

Past Event

Competition Policy and Extraterritoriality

An in-depth look at competition policy.

Speakers: Guntram B. Wolff and Jean Pisani-Ferry Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 16, 2018
Read about event More on this topic

Upcoming Event

Nov
21
14:00

Competition Policy for the digital age

How can competition policy adapt to market changes caused by new technologies, digital platforms and big data companies?

Speakers: Ana Botin, Jorge Padilla and Tommaso Valletti Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author

Parliamentary Testimony

European Parliament

Brexit and industry & space policy

Testimony before the European Parliament's Committee on Industry, Research and Energy (ITRE).

By: Reinhilde Veugelers Topic: European Parliament, Innovation & Competition Policy, Testimonies Date: September 25, 2018
Read article More on this topic More by this author

Opinion

Japan must boost R&D to keep rising Chinese rivals at bay

As China shifts into a more advanced industrialised economy, Japan has slowly but surely lost to some of its comparative advantages to its rival. One possible solution to help the government keep pace would be to concentrate research and development efforts on a few key sectors where Japanese players still hold a large competitive lead.

By: Alicia García-Herrero Topic: Innovation & Competition Policy Date: September 20, 2018
Read about event

Past Event

Past Event

China's digital economy

How to measure China's digital economy?

Speakers: Alicia García-Herrero, Claudia Vernotti and Reinhilde Veugelers Topic: Global Economics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 17, 2018
Read about event

Past Event

Past Event

Bruegel Annual Meetings 2018

The 2018 Annual Meetings will be held on 3-4 September and will feature sessions on European and global economic governance, as well as finance, energy and innovation.

Speakers: Maria Åsenius, Richard E. Baldwin, Carl Bildt, Barbara Botos, Maria Demertzis, Benjamin Denis, Lowri Evans, Mariya Gabriel, Svend E. Hougaard Jensen, Joanne Kellermann, Jörg Kukies, Emmanuel Lagarrigue, Philippe Lespinard, Rachel Lomax, Dominique Moïsi, Jean Pierre Mustier, Ana Palacio, Jean Pisani-Ferry, Lucrezia Reichlin, Norbert Röttgen, André Sapir, Johan Van Overtveldt, Martin Sandbu, Margrethe Vestager, Reinhilde Veugelers, Nicolas Véron, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Brussels Comic Strip Museum, Rue des Sables 20, 1000 Brussels Date: September 3, 2018
Read article Download PDF

External Publication

Export and patent specialization in low carbon technologies

The low-carbon technology sector is going through a period of disruptive innovation and strongly increased investment, which is likely to continue. Global investment in new renewable power is the largest area of electricity spending. The political momentum to combat climate change was reinforced in the Paris Agreement, when almost every country in the world agreed to aim for carbon neutrality in the second half of the century.

By: Robert Kalcik and Georg Zachmann Topic: Energy & Climate, Innovation & Competition Policy Date: August 7, 2018
Read article Download PDF More on this topic More by this author

External Publication

The impact of artificial intelligence on employment

Technological development, and in particular digitalisation, has major implications for labour markets. Assessing its impact will be crucial for developing policies that promote efficient labour markets for the benefit of workers, employers and societies as a whole.

By: Georgios Petropoulos Topic: Innovation & Competition Policy Date: July 31, 2018
Read article More by this author

Parliamentary Testimony

European Parliament

Economic benefits of the Digital Single Market

Testimony before the European Parliament Committee on the Internal Market and Consumer Protection (IMCO).

By: J. Scott Marcus Topic: European Parliament, Innovation & Competition Policy, Testimonies Date: July 18, 2018
Read about event More on this topic

Past Event

Past Event

Should we revisit the patent system for pharmaceutical products?

Analysis of the legal issues with the current IP system for regulated market authorisations for pharmaceutical products, as well as its economic effects.

Speakers: Arno Hartmann, Christian Jervelund, Margaret K. Kyle, Roberto Romandini, Bruno van Pottelsberghe, Amaryllis Verhoeven and Reinhilde Veugelers Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 9, 2018
Read article More by this author

Parliamentary Testimony

European Parliament

The potential impact of Brexit on ICT policy

Testimony before the European Parliament's Committee on Industry, Research and Energy (ITRE).

By: J. Scott Marcus Topic: European Parliament, Innovation & Competition Policy, Testimonies Date: June 27, 2018
Read article More on this topic

Blog Post

Robots, ICT and EU employment

Disruptive technologies based on ICT, robots, and artificial intelligence have transformed labour markets through their important effects on employment. As the number of industrial robots continues to rise, our results imply that some measures to facilitate workforce transition and accommodate the rise of automation might be needed to maintain satisfactory labour market outcomes.

By: David Pichler, Georgios Petropoulos and Francesco Chiacchio Topic: Innovation & Competition Policy Date: June 15, 2018
Load more posts