The Crisis, External Imbalances and

Competitiveness in the Euro Area

Giorgio Barba Navaretti,

University of Milan and

Centro Studi Luca d’Agliano

LAC-EU Economic Forum 2013Santiago, January 21st 2013

2 Sources: EC and Eurostat. Notes: Countries are ranked according to GDP per capita in 1999. GDP per capita, relative to the EA, in PPS.

20

40

60

80

100

120

140

160

EE SK SI MT PT GR CY ES EA FI FR IT DE BE IE NL AT

-18

-12

-6

0

6

12

GDP per capita (relative to EA) in 1999 (LHS)GDP per capita (relative to EA) in 2010 (LHS)Current account deficit (% GDP), average 1999-10 (RHS)

EU growth, competitiveness and current account imbalances

Capital inflows in the right direction, but not to the best use

External imbalances: Things change

Source: Barues, Lawson, Radziwill and Lane, OECD WP

External Imbalances: Forecast of Decline in the Periphery

Source: IMF, WEO, October2012

Macro Macro and then??

Debate on “competitiveness”: macro indicators

•Real Effective Exchange Rates (REER)•Unit Labor Costs (ULC)•Export shares•Current Account (in % of GDP)

Correcting External Imbalances:Is Deflation Enough?

Source: IMF, WEO, October2012

INDUSTRY?

Source: OECD and IMF. Data for 2011, except Spain 2010

Sectors?

Manufacturing Trade Balance/GDP (%)Manufacturing Trade Balance/GDP (%)

And micro?

Nations and sectors do not produce, do not trade, do not compete; it is firms that produce trade and compete.

BUT

Firms?

Average firm size

What do we learn when we look at firms?

THE EFIGE SECOND POLICY POLICY REPORT

•Differences in country patterns:• German and French more sophisticated internationalisers

• Spain and Hungary lagging behind

• Italians, higher export propensity

•Firms characteristics affect internationalisation patterns in a remarkably similar way across countries

•Patterns explained mostly by firm characteristics

Country differ because they have a different industrial structure

Number of Destinations of ExportsMany Firms in Few Countries, Few Firms in Many Countries

Policy: How to shift these distributions to the right?

Source: Altomonte, Aquilante, and Ottaviano (2012)

Global Operations and TFPWatch Out for the Causality Link

Perspective: higher moments = reallocation of resources

Source: Altomonte, Aquilante, and Ottaviano (2012)

Global Operations and TFPThree steps

1. Identify thresholds

2. Identify firms moving above thresholds

3. Identify features of firms moving above thresholds

What it takes to move up

1. Higher ex ante productivity

2. More human capital

3. No family managers

4. Less leverage

5. Foreign groups

IMPACT ON TOTAL EFFICIENCY AND TRADE DEPENDS ON

REALLOCATIVE EFFECTSBUT

• Industrial structure (distribution of firm characteristics) important for trade imbalances

• Caveat: export not necessarily Nirvana

• => But clearly export competitiveness reflects efficiency and growth of industry and viceversa

• German miracle: did Germany have an industrial structure able to respond to changes in incentives?? • = > Mittelstandt ? Fraunhofer?• For other countries is firms growth important (Italy)?

• Nothing can be forced, but impediments to growth? And does reallocation of resources favour productivity growth?

• Finally what about industrial policy??

Implications

Country Top 1% Top 5%Top 10%

Top 20%

FRA 48,9 75,8 85,7 93,1GER 22,9 52,8 68,8 82,9ITA 50,4 69,7 78,1 86,8SPA 27,1 65,2 78,5 89,0

Share of Total Exports for Top Exporters, by Country

The Happy FewExports Very Concentrated

What Explains Export Status?Firms’ Features

7%

29%

64%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100% Firm Characteristics

Sector Effects

Country Effects

A Simple Decomposition

• To quantify the importance of size and sector, apply to ITA, FRA and SPA the German structure (Germany only as benchmark; no suggestion to become German!)

• Keep fixed a country’s total employment in the manufacturing sector and shift workers across firms and sectors to replicate German structure

• How? Changing the weighting scheme as if sample firms in ITA, FRA and SPA were drawn from German population

• Importantly, keep a country’s export propensity and export share by size and sector classes

Export rise if we apply German industrial strucure, more in Italy and Spain than in France

(Number of workers constant)

Italy: Most of the

action is size

France and Spain,

industry matters

most

Switchers and the rest2001/2 vs 2008/9

Source: Altomonte, Aquilante, and Ottaviano (2012)