Europe’s Competitiveness Trap

European policymakers are obsessed with national “competitiveness,” and genuinely appear to think that prosperity is synonymous with trade surpluses. But economic growth, even in traditionally export-led economies, is driven by productivity growth, not by the ability to capture a growing share of global markets.

LONDON – A flawed understanding of what drives economic growth has emerged as the gravest threat to recovery in Europe. European policymakers are obsessed with national “competitiveness,” and genuinely appear to think that prosperity is synonymous with trade surpluses. This largely explains why Germany is routinely cited as an example of a strong, “competitive” economy.

But economic growth, even in traditionally export-led economies, is driven by productivity growth, not by the ability to capture a growing share of global markets. While imports must, of course, be financed by exports, the focus on trade competitiveness is drawing attention away from Europe’s underlying problem – very weak productivity growth. And this is as serious a problem in the economies running trade surpluses as it is in those running deficits.

The idea that economic growth is determined by a battle for global market share in manufactured goods is easy for politicians to grasp and to communicate to their electorates. Economies running external surpluses are regarded as “competitive,” regardless of their productivity or growth performance. The trade balance is seen as a country’s “bottom line,” as if countries were firms. In fact, they have little in common – the trade balance is simply the difference between domestic savings and investment or more broadly, between aggregate spending and output – but referring to Deutschland AG, or UK plc, is conceptually attractive and seductively easy.

To continue reading, please log in or enter your email address.

To read this article from our archive, please log in or register now. After entering your email, you'll have access to two free articles every month. For unlimited access to Project Syndicate, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/SQWjkQ5;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.