Editor's note:This is the second of two articles based on Pascal Lamy's recent talk to the Paris-based Notre Europe think tank, of which Mr. Lamy is the honorary president. Yesterday: "World must change the way it measures trade flows"
To explore the prospects for Europe in a global economy in the grip of change and development, we first have to put to bed two clichés that too often foul the debate and prevent it from making any progress.
The first cliché argues that Europe is a victim of the new international division of labor. All the available figures show us that that view is mistaken. In the change in production methods that we have witnessed over the past 20 years and more, Europe is coming out of things far better than either the United States or Japan.
Europe’s market share of international trade has remained more or less stable throughout this period, hovering around the 20 percent mark, while the US and Japanese market shares have shrunk substantively. The European Union’s foreign trade surplus in the industrial sphere has trebled over 10 years, hitting somewhere in the region of 200 billion euro.
But as we have seen, that same period has witnessed major progress on the part of the emerging countries, with China heading the list. The countries of Europe, Germany in particular, are especially well placed to benefit from their comparative advantages at a time when the emerging countries have to import considerable quantities of manufacturing technologies and goods. So we can hardly call Europe a victim; indeed, so far it has rather profited from the globalization process.
The second cliché: Europe is naive in that it allows itself to be taken advantage of and overtaken by its trading partners, and the porous nature of its borders is said to be the most obvious demonstration of this state of mind.
In point of fact, these statements cannot withstand even the most modest analysis of the facts and figures. Europe’s borders are neither more nor less porous than those of comparable developed countries. This applies to traditional trade barriers, customs duty and quotas, but also to such commercial protection measures as anti-dumping rules and countervailing duties, or to technical quality, food safety, and environmental safeguard standards.
Europe is no more naive than its trading partners that enjoy a comparable level of development.
Europe’s problem – its weak growth and crippling unemployment – are thus not simply linked to international trade but to different factors, and thus we should not be seeking solutions to that problem in a fallback commercial policy built on increasing the number of obstacles to trade.
The prices of European products have tended to become increasingly less competitive over the past few years. Salary levels are sometimes mentioned as being one of the causes for this, but there is absolutely no point in comparing hourly wages without relating them to the productivity of the working hour.
Where competitiveness is concerned, the fact that a European worker earns far more than his Chinese counterpart is of little consequence so long as that higher hourly wage level is reflected in greater efficiency and greater productivity. Thus when we look at salaries, we have to set them against worker productivity.
Having said that, it is glaringly obvious that Europe’s hourly productivity is currently being eroded, particularly compared with the US. The euro’s high rate of exchange against the dollar in recent years has also had a far from negligible impact on European products’ loss of competitiveness in the world’s marketplaces.
In parallel with price competitiveness, Europe’s (and especially Germany’s) comparative advantage stems largely from its “non-price competitiveness.” This type of competitiveness comprises all of those characteristics that cause a product to stand out positively among its competitors, regardless of price. In particular, it comprises know-how, quality, and innovation, which allow a company to sell the same products as its competitors but at twice the price.
This explains the performance of the German manufacturing system – and that performance, incidentally, is on a par with the average figure for the European community, according to the most recent figures.
The countries of central and eastern Europe have made enormous progress in terms of price competitiveness; yet while they have now overtaken even the Germans, they perform less well than those in the field of “non-price competitiveness.” Other countries, on the other hand, have fallen below the average, performing less well in the sphere of price competitiveness, like Italy, or less well in the sphere of “non-price competitiveness,” like France.
The difference between France and Germany in terms of comparative advantage on the international trade scene does not lie in price competitiveness, because salaries and productivity are the same in both countries. The Germans, on the other hand, enjoy a very clear comparative advantage in the field of “non-price competitiveness,” in other words, in terms of the range of products that they manufacture and export.
The level of specialization that sets France apart from Germany does not lie in pure product but in the range of products offered. “Up-market” products are sold at a higher price and guarantee higher profit margins. Their quality attracts consumer loyalty and confidence, and this, to some extent, shields manufacturers from having to worry about fluctuating global prices and competitor attacks.
We have to admit that comparative advantage is going to depend on price competitiveness but also to a large extent on “non-price competitiveness.” Thus the problem of Europe finding its place in the new global economy boils down to a European “domestic” issue. The external environment is not negative; on the contrary, it is rather positive.
The necessary reforms
Europe enjoys comparative advantages that ought to allow it to find its full place in the global economy. If we accept the idea that an improvement in its integration into international trade depends first and foremost on its internal policies, then we need to go back to the basic problem, which is a problem of excessively weak economic growth in Europe. That was true before the euro crisis, when the European Union’s potential for growth hovered around the 2 percent to 2.5 percent mark, but since the start of the crisis that potential for growth has decreased by half.
On a global scale, Europe is an island of prosperity and well-being thanks to a welfare system that is of unquestioned quality, yet whose sustainability depends on significant growth both in the economy and in the population. However, Europe has a problem in both of those spheres.
A well-known solution to its demographic problem would involve falling back on immigration, but it is difficult to envisage such a solution being adopted in the short term on account of the positions espoused by Europe’s political forces on the issue. It would also be opportune to make it easier for people to reconcile their personal and professional lives, and to remove obstacles standing in the way of an increase in the birth rate, which has dropped to critical levels in European countries where the generational turnover is no longer guaranteed – although there are a few exceptions, and one of them is France.
Where potential for growth is concerned, the crisis has highlighted difficulties incurred through the problem of excessive debt. The only way to keep the social security system going without significant demographic growth is by increasing the economic growth rate. Yet it is difficult to impart a fresh boost to the growth of an economy whose potential for such growth has been damaged by the crisis and which is having to cope with the burden of deleveraging.
Yet therein lies the whole issue: It is a matter of boosting potential for growth by 1 or 1.5 percentage points in order to be able to continue funding the European welfare system and to pay down the debt that has built up to date.
The reforms required to achieve this goal and to make the best of Europe’s comparative advantages are long-term reforms primarily regarding its education, training, and innovation system. It is in that sphere that the difference between countries and continents is going to be seen.
A population’s level of education is the single variable that has best evinced differences in economic growth and success worldwide over the past 40 or 50 years. But public education and innovation policies can have an impact only in the medium and longer terms. So in view of that, how can we stimulate growth in the short term? It is a matter of devising measures whose impact can be felt at once.
We may find an answer to that question on the labor market, yet we have to combine fiscal and budgetary measures in order not to reduce productive public expenditure, which has a driving effect on the economy, and to avoid any rise in manufacturing costs so that we can protect our price competitiveness.
Finally, monetary policy can also serve as a short-term lever for action. According to the Bruegel think tank, there is a way of managing the inflation differential within Europe intelligently so as to restore part of the competitiveness that is missing in the south. Inflation at 2.5 percent to 3 percent in northern Europe, coupled with lower inflation – at, say, 1 percent – in southern Europe would gradually allow countries that cannot devalue their currency to recover, to some extent at least, the price competitiveness they lack.
In sum, Europe’s dearth of price competitiveness and of “non-price competitiveness” must be the target of future public policies, which will give Europe the means to benefit from the comparative advantages that it should have. Education, training, and innovation policies, the meticulous management of intra-community inflation, and greater fluidity in the labor market are the pillars of a courageous reform equal to Europe’s legitimate ambitions in an increasingly competitive world.
Pascal Lamy is the director general of the World Trade Organization.