German investors have lost almost half a trillion euros on their foreign investments since the onset of the crisis.
Gaining price competitiveness is therefore not a winning strategy, and can hardly be at the core of any reasonable definition of competitiveness. The final analogy between a country and a company concerns quality: producing better or more goods and services with fewer inputs. A competitive country in this sense is a productive country that manages to combine the factors of production in the most efficient way, and thereby also creates incentives for more investment.
As a result, its citizens are economically better off. To define competitiveness as productivity thus comes closer to a proper definition of competitiveness, as it could be applied to countries. State institutions, labour and financial markets, infrastructure and education, and many other things interact to make a country productive, and hence competitive; and it is in all of these areas that countries need to invest both money and political effort.
First, the best mix of policies to make a country more productive may differ from country to country, even when these countries are at a similar stage of development. Becoming more competitive therefore means working with a highly imperfect and country-specific set of institutions, rules and constraints. Other constraints could stand in the way, for example a lack of funding for firms that could make use of more liberal product markets.
limewedgoydesk.tk In such a second-best setting, it is very difficult to determine the correct sequence of reforms, and whether they are compatible with other institutions in an economy. The most well-intentioned structural reforms, implemented at the wrong time, can fail to generate economic growth or can even make matters worse.
For example, labour market liberalisations in the midst of a downturn can exacerbate already weak demand — unless exports can pick up the slack. This notion is particularly relevant for the eurozone: the current lack of demand requires a laser-like focus on structural reforms that can immediately unleash investment, without hurting demand further. Finally, improving competitiveness is not a goal but a process.
A country needs to constantly reassess its policies and institutions, and target reforms at the most binding constraints on productivity growth, whatever those may be at the time.
Countries therefore need to have the political institutions in place that induce policy-makers to constantly implement reforms aimed at improving productivity. The best forum for this constant deliberation is a well-functioning, pluralist democracy — which requires, besides regular and fair elections, an independent press that scrutinises the claims of vested interests and objectively informs the electorate; researchers and intellectuals that question conventional wisdom and explore new ways to organise society and the economy; and a fine balance between interest groups and less well-represented groups in the democratic process.
A comprehensive concept of competitiveness therefore requires the following. At the European level, the acute lack of demand, especially in the eurozone, makes it hard for structural reforms to pay off. Therefore, the European Central Bank ECB needs to be bolder in its monetary policy; and Europe should rethink its fiscal policies so that the combined fiscal and monetary stance of Europe ensures sufficient demand.
Moreover, companies need access to a deep pool of financing, both equity and debt, that only a Europe-wide capital market and banking system can provide. Without adequate funding, firms cannot easily invest to take advantage of newly opened markets or new innovations. Firms that grow strongly and thereby create the most jobs , and innovative young firms, often have particular trouble financing their expansion in Europe, as they lack the collateral to convince banks to fund them. Equity financing or venture capital markets are underdeveloped in Europe.
To increase productivity, European policy-makers should focus on areas where a larger market size and increased competition between firms can boost investment, innovation and hence productivity, for example in tradable services. Here, Europe has lagged behind the US in terms of productivity growth for more than a decade.
The papers collected in this volume are those presented at the eighteenth Colloquium arranged by the Societe Universitaire Europeenne de Recherches. The Competitiveness of Financial Institutions and Centres in Europe by D E Fair, , available at Book Depository with free delivery worldwide.
Finally, the EU should agree on stronger democracy-enhancing reforms and initiatives, such as common enforceable standards for a fair and transparent justice system, or support for a free and pluralistic press. The EU should also use its competition and consumer protection tools more aggressively to tackle national vested interests.
At the national level, European countries need to ensure that their tax systems support a meritocratic and risk-taking society. Member-states should end the favourable tax treatment of debt, relative to equity, to encourage the more innovation-friendly equity financing of firms.
Tax incentives for private investment should also be stronger during a downturn, to encourage investment when the economy most needs it. In addition, the state should invest more in research and development, with the explicit aim of maximising innovation. Governments should also provide more risky equity financing themselves: under such a system, the public purse would suffer the inevitable losses of innovations that fail, but also reap the benefits of those that pay off.
In combination with other reforms, such investment would generate high returns for many European countries, particularly those that have invested very little in recent years, such as Germany.
In order to become more competitive, Europe should stop using the word competitiveness. It is a nebulous concept, too vague to guide policy, and easily misused by interest groups to push for policies that serve some but not society as a whole. Instead, Europe should focus on productivity growth and ask how best to achieve it. The answer will be much more complex than the word competitiveness suggests.
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