Thursday, March 6, 2014

EC: Cutting Wages Will Not Restore French Competitiveness

A 2012 report from the European Commission suggests that efforts to cut effective wages, including the Responsibility Pact signed yesterday by the MEDEF and 3 trade unions, will not help French export performance as much as some hope:
This finding is summarized in the following graph taken from the 2012 imbalances report on France. It shows that price competitiveness only played a very small, almost to be ignored, role in explaining export performance of manufactured goods over the entire 1999 – 2009 period. Instead, export dynamics are to be explained by growth in export markets and non-price competitiveness. The latter is estimated as a residual and refers to the quality of the goods being produced, their level of sophistication and complexity, the efforts in terms of research and development and the ability of firms to engage in exports. As can be seen from the graph, non-price competitiveness has contributed positively to export dynamics of Germany while dragging export growth of France down.
However, this finding is completely at odds with the policy of internal wage devaluation that is actively being promoted by the Commission across major parts of Europe, stating that to improve competitiveness, wages and wage formation systems need to become extremely flexible.


Mitch Guthman said...

I don't want to say I told you so but I told you so.

FrédéricLN said...

And I agree too :-)

European states are fighting each other in a "labour cost dumping maelstrom" (cutting taxes and "cotisations" rather than salaries, meaning, inflating public debt) which may cause wreckage.

It's just sad.

The reason may just be the lack of imagination. When you can't see how to improve your product, you just cut the price — and, quite often, you fall with you market.