French Competitiveness: New Challenges, New Measures
The World Economic Forum, which publishes the annual Global Competitiveness Report covering over 140 economies, defines competitiveness as “the set of institutions, policies and factors that determine the level of productivity of a country”.
A country’s ability to gauge what the building blocks of competitiveness are is crucial to devising policies that can help develop its economic performance in global markets and drive its prosperity.
In this spirit, France Stratégie and the Banque de France organized a day-long conference on 16 December 2015 to take stock of French competitiveness in the European and global context.
The rule of the game for the EU
Fostering industry that can compete effectively on the world stage has taken on even greater importance within the eurozone. As François Villeroy de Galhau, governor, Banque de France, put it, “competitiveness has become the rule of the game” since countries can no longer devalue their currencies.
Given its significance, in October 2015 the European Commission adopted a recommendation for the creation of national competitiveness councils across Europe to monitor wages, prices, employment and growth and propose measures to boost competitiveness.
Another initiative, the Competitiveness Research Network (CompNet), was launched by the European Central Bank (ECB) in March 2012. It aims to measure and provide an understanding of the dynamics of competitiveness and productivity in EU countries and firms, linking indicators such as exports, productivity, market shares and economic growth. Participants in the network include all EU national central banks and international organisations involved in studying competitiveness.
Filippo di Mauro, CompNet chairman and senior adviser, ECB, stressed the importance of analyzing international trade and global value chains (GVCs) from a firm level rather than simply from a macroeconomic viewpoint.
As ECB president Mario Draghi stated in Paris in 2012 at the height of the European debt crisis, productive companies are the engine of competitiveness, with institutional and macroeconomic conditions providing the fuel to drive employment, investment and trade.
Not surprisingly, there is an increasing consensus of the need to study firms individually to suss out how well a country competes internationally. As Gabor Békés, research fellow, Hungarian Academy of Sciences, pointed out, there is a lack of harmonized European data on the different aspects of competitiveness, particularly when it comes to micro-data.
With this in mind, six European universities and research centres created the Mapping European Competitiveness (MAPCOMPETE) project in 2013 to analyze EU-wide data requirements at the macro, sectoral and micro levels and put forth collection methods for topics such as GVCs, trade, pricing and quality.
The project, which concluded mid-2015, reaffirmed the importance of firm-level data and the necessity of ensuring such data is collected across the EU.
When determining an economy’s competitiveness, export market shares are often relied on. However, as Guillaume Gaulier, economist, Banque de France, posited, firms not only compete for market shares in external markets but also domestically. The performance gap between Germany and France, for example, is narrower when the former’s weak domestic market is taken into account.
He also stressed the importance of recording trade in value added rather than gross sales, which can be misleading due to the fact that inputs in the value chain can be counted twice or more.
By way of example, when value added and domestic markets are taken into account, Gemany’s global market shares don’t outpace those of France and Italy until 2011.
As implied above, a major stumbling block to fostering competitiveness in the eurozone and the EU is the widely divergent nature of the constituent economies.
For one, there are significant macroeconomic differences within the monetary union, with countries such as France, Italy and Portugal having high levels of government debt and running current account deficits (or at least until 2013 in the case of the latter two). Germany and The Netherlands, on the other hand, both have substantial trade surpluses and lower levels of public debt.
The EU introduced its Macroeconomic Imbalance Procedure in 2011 to screen for such economic imbalances so that policy makers can address them.
When it comes to competitiveness, the MIP also looks at the percentage change in export market shares over five years, the percentage change in nominal unit labour cost over three years and the percentage change in real effective exchange rates (REERs) over three years.
Divergent wages also strongly influence competitiveness. Xavier Ragot, economist and president of the Paris-based French Economic Observatory (OFCE, Observatoire français des conjonctures économiques), explained the tendency in the EU since the crisis to push for lower wages in countries with structural deficits to make them more competitive (prior to the crisis wages were left to diverge sharply in the EU, leading to significant trade imbalances).
“We’ve created a deflationary spiral by encouraging numerous countries to lower their wages,” he pointed out. “An urgent step that needs to be taken is to push countries that have leeway to increase their wages.”
Looking to the longer term, he added, “A coordinated adjustment of wages among European countries needs to take place.”
Michel Houbedine, French Treasury (Trésor), concurred there is a need for coordination of national policies with respect to economic governance.
At the same time, domestic measures to boost economic performance in individual countries beyond simply focusing on price and cost competitiveness must be instituted. “The necessary European coordination in no way replaces the indispensable domestic reforms,” said Villeroy de Galhau.
Beyond price and costs
Francesco Zollino, Bank of Italy, stressed how global value chains (GVCs) have decreased the importance of labour costs in explaining a country’s price competitiveness.
Moreover, price competitiveness itself, along with potential demand trends, is insufficient in explaining export growth in recent years. Indeed, Thierry Mayer, professor of economics, Paris Institute of Political Studies (Institut d’études politiques de Paris), showed that in the past fifteen years non-price competitiveness has been the main driver of exports and market share across advanced economies.
However, it is worth emphasizing that this non-price competitiveness remains elusive and difficult to pinpoint. Essentially, it’s determined by taking market share and subtracting price competitiveness.
Along these lines, there is a consensus that the EU cannot compete on costs alone with emerging countries. As di Mauro reminded the conference attendees, Europe’s comparative advantage has to come from combining cost competitiveness with specialisation in high value-added activities.
Haithem Ben Hassine, analyst, France Stratégie, confirmed this, pointing to a paper he co-authored where he demonstrates the cumulative positive effects of quality on exports in OECD countries.
The rub, as it were, lies in the fact that it remains a difficult-to-define concept. Aspects such as quality, innovation, design, brand image, distribution networks and so on are integral to it.
Quality is perhaps the most important, accounting for 40% of prices, he said. German products, unsurprisingly, are on average more competitive in both cost and quality than French ones.
Mayer stated that although all advanced economies are losing market shares due to increased competition from emerging countries, France’s slice of the pie in both goods and services is dwindling faster than most EU countries.
It has decreased from 6.1% of the global market in goods and services in 1995 to a mere 3.5% in 2013. There has been a steady decline, whereas Germany and the UK, for example, experienced a decline followed by a rise before a subsequent drop (from 9.4% to 7.4% for the former and 4.9% to 3.6% for the latter).
He pointed out that poor French export performance is linked to an inadequate price/quality ratio as opposed to poor country or product positioning. High-end products and luxury goods are an exception.
It follows that cost competitiveness remains important for France despite it being a member of the eurozone.
To redress its lagging export performance, France has shown it is willing to reduce social charges on companies employing salaried workers by providing them with a tax credit equivalent to 6% of payroll (the government has financed the measure, the CICE, largely by reducing public spending and also in part by raising certain sales taxes).
Lest anyone think a country like France can increase its competitiveness in any long-standing way by lowering wages, Gilbert Cette, director, international studies and relations, Banque de France, reminded attendees otherwise. It may boost price competitiveness in the medium term, he said, but non-price competitiveness is what counts in the long haul, even if it takes longer to develop.
Ragot, for his part, emphasized the importance of investing in the digital economy and education as a means to improving France’s competitiveness.
One thing is certain, as Jean Pisani-Ferry, Commissioner-General, France Stratégie, underlined, enhancing competitiveness is not simply about lowering costs in sectors exposed to international trade; it is also about ensuring manufacturing can attract both labour and capital. And Germany has certainly been more successful at this than France