Reden und Präsentationen

Es gilt das gesprochene Wort.

Ladies and gentlemen!

It is a particular pleasure for the Oesterreichische Nationalbank and myself to welcome you to the second day of our Conference on European Economic Integration. I hope you appreciated yesterday’s presentations and stimulating discussions as much as I did, and now look forward to today’s contributions – I am convinced that they will be very insightful and interesting, too. 

Moving on from yesterday’s sessions, which dealt predominantly with currency issues, in my opening statement today I would like to go a little deeper into the second main issue of this event: Competitiveness. 

International competitiveness ranks among the most widely discussed topics, both within economics and within politics. And the issue truly deserves this prominent standing. Competitiveness is one of the most important and far-reaching features of an economy and is referred to in such diverse contexts as in wage negotiations, industrial and structural policy, exchange rate developments or international trade. Quite a few of the “growth miracles” of the last decades may be traced to impressive gains in international competitiveness and export-led growth. Prominent examples include emerging Asia and China.

 
Competitiveness is a very broad concept and touches many areas, as is reflected by the broad range of indicators that have been devised to measure it. These include unit labor costs, sectoral and regional trade structures, quality and technology upgrading of produce and location factors like tax systems. The most prominent and most widely used concepts, however, are different exchange rate indicators.

  
Against this backdrop, today’s second session will ask whether the exchange rate is in fact as important a measure of national competitiveness as it used to be. It should be very interesting to see how the esteemed experts who join us for that part assess this point. Before that, our first session will approach the exchange rate subject from the special perspective of the countries of the euro area. To round off the debate, the panel discussion in the afternoon will provide the position of business makers and will elaborate on the question of whether exchange rates still matter in corporate decision-making or whether strategies like pricing to the market, currency hedging or outsourcing have reduced the standing of exchange rates in business plans.

 
In my opinion, exchange rates are significant for competitiveness, but they are certainly not the only important factor. For example one defining feature of the catching-up process of the Central and Eastern European countries was and still is real appreciation, partly due to productivity differentials between the tradable and non-tradable sector (also known as Balassa-Samuelson effect). Nevertheless, the countries in Central and Eastern Europe have managed to increase their economic wealth substantially within a comparatively short period of time. Such gains in welfare were often associated with very robust developments of external trade. Exports as well as imports have been increasing strongly for an extended time span, and countries have become more and more integrated into international production networks.

 
This dynamic development seemingly conflicts with real appreciation as this should increase imports and decrease exports, provided all other factors were to remain constant. But other factors are rarely constant. The CEECs managed to transform their economies from centrally planned systems to market economies. Substantial progress has been achieved in the areas of property rights and privatization as well as capital and trade liberalization. The twelve new EU member States have anchored their institutional structures to the EU, and now they are being viewed as increasingly secure places for investing and doing business in general.

 
This in connection with an initial productivity boost after the overcoming of certain weaknesses inherited from the communist era – like labor hoarding, overemphasis of heavy industry or inefficient management practices – contributed to an ever improving standing of the region vis-à-vis the rest of the world. This is underlined for example by increasing world market shares or strong FDI inflows. During the past few years some of the countries also managed to successfully upgrade the technological and quality structure of their export production, which helped to secure existing market shares and to gain further importance in international trade. Against the backdrop of those improvements, appreciation did not pose a serious obstacle to competitiveness and economic development. This seems to underline that the external value of a currency is not the only decisive feature when it comes to the competitive position of a country.

A specific setting where exchange rates don’t matter at all for competitiveness is within a monetary union. The countries constituting the union have given up the tool of national exchange rate policy for the benefits of introducing a common currency. But of course the absence of national currencies and therefore the absence of exchange relationships among them does not mean that questions of competitiveness loose their importance. In a certain sense they are even more important in such a context, as the exchange rate can no longer act as an adjustment mechanism to adverse developments. All the burden of adjustment then lies on wages and prices, and this may – as experience tells us – be a painful and tedious experience.

 
But what does matter for quantitative competitiveness in a monetary union is the development of unit labor costs. If increases in unit labor costs in a particular country are substantially larger than average for an extended time span, the country in question looses competitiveness vis-à-vis the other members. Production becomes relatively more expensive, and exporters are increasingly facing difficulties to compete in the internal market. This will ultimately impact the current account, economic activity and employment. As devaluating the currency is no longer an option in national economic policymaking, such a development could result in prolonged stagnation. Some observers have even noted that such effects may threaten the stability of the whole monetary union.

 
In the euro area, the growth pattern of unit labor costs is indeed divergent. In some countries, unit labor costs have been increasing substantially stronger than average for an extended period of time (e.g. in Ireland, Greece, Spain, Italy, Luxembourg, Portugal). In most of the cases this can be traced to comparatively weak productivity developments and strong wage increases (Spain, Italy, Luxembourg, Portugal). However, there is also one example – Ireland – where rising wages have accompanied very solid productivity developments.

 
Excessive unit labor cost growth is a concern per se. However, it can be more of a problem for some countries than for others, depending on the underlying drivers of wages and productivity. Differences in unit labor cost may be the outcome of a catching-up process, they may reflect different positions of countries within the economic cycle or to country-specific shocks. But adverse developments may also be the consequence of structural shortcomings or inappropriate policies. In the first two cases I mentioned pronounced unit labor cost differentials should not constitute a long-term phenomenon. However, inflexible labor markets, a lack of competition in product markets or inefficient taxation systems for example may well permanently constrain productivity and increase wage pressure. Such causes tend to lead to more serious problems as they are potentially long lasting.

Against this backdrop, increasing importance should be attached to policies that will meaningfully combat such deficiencies. Structural reforms as for example laid down in the Lisbon agenda constitute an especially useful policy option. Not only do they help increase competitiveness by improving cost-efficiency and by lifting innovative capacity as well as educational attainment, they also boost growth and employment.

 
With a view to competitiveness, paramount measures include structural reforms to stimulate productivity growth, especially in the services sector; to foster competition; and to improve the functioning of market mechanisms, especially in the labor markets. An important advantage of such a set of policy actions is that they create conditions that allow wages to increase without putting pressure on prices and reduce the required adjustment of nominal wages in situations when competitiveness losses must be restored.

Needless to say, the single monetary policy of the Eurosystem cannot and will not address competitiveness problems in individual countries. But a credible monetary policy aimed at maintaining price stability in the medium term and solidly anchoring medium- and long-term inflation expectations can decisively contribute to a stable economic environment. In a stable macroeconomic context, it is not only easier to single out where reforms are needed, but the benefits of reforms are also made more visible and convincing, thus supporting their acceptance.

 
Ambitious structural reforms are not only important from a domestic perspective. Globalization and far-reaching international integration of financial markets have led to the build up of sizeable current account mismatches in the world. Against the backdrop of a current account close to balance, the euro area can best contribute to an orderly unwinding by making its economy more flexible and adoptive, and this is exactly what the Lisbon agenda aims to achieve. Financial market reform and further deregulation of product and labor markets would positively impact saving and investment decisions in Europe and increase economic momentum. This would not only reduce the risk emanating from global imbalances but would also help to buffer the negative economic impact of an abrupt unwinding, should it finally occur. The manifold positive effects of structural reforms make their implementation a priority.

Ladies and gentlemen,
Let me briefly comment on some recent developments in the foreign exchange market.

 
We have seen quite some appreciation of the euro vis-à-vis the dollar since the beginning of the year. In some countries this triggered fears that their economy may be unduly affected by the strong euro. Subsequently, discussions ensued of whether the monetary policy strategy of the ECB should be expanded to explicit incorporate exchange rate considerations. Such requests, in my opinion, are ill-conceived.

Although a strong euro reduces sales abroad, it boosts spending at home. Cheaper imports raise the real income of households and thereby fuel consumption. In the euro area, where household spending has been sluggish, a shift in demand away from exports would be welcome. Cheaper imports also keep a lid on inflation. This seems especially important in times of high and rising oil prices. Finally, a deliberate management of the exchange rate can only act as a short-term cure for competitiveness problems and may well have adverse effects in the long run. The euro’s strength is a powerful market signal that induces productivity advances in the export-oriented sector and may speed up a necessary shift in resources to more profitable lines of work. In that sense, the exchange rate can act as an agent for structural change and contribute to an elevated level of productivity. This will ultimately impact growth and competitiveness and easily outweigh the short-lived gains of active exchange rate management.