Competitiveness in a Currency Union and Its Leverage or How Germany Gains from the Euro

Abstract

Despite the widespread use of the notion of a country’s competitiveness in public policy discussion, there is some reluctance among academic economists in accepting the concept. The competitiveness notion can be made theoretically acceptable by distinguishing its useful integral part, which relates to comparative productivity and the intrinsic developmental potential of an economy, from its shady part, which is associated with exploitative mercantilism. For this reason, a distinction is made between ‘essential’ competitiveness and ‘apparent’ competitiveness.

Unlike ‘apparent’ competitiveness, ‘essential’ competitiveness is not at all dependent on the exchange rate. Under freely floating exchange rates, any change in a country’s ‘essential’ competitiveness tends to be accompanied by an opposite change in ‘apparent’ competitiveness. But in a currency union the ‘apparent’ competitiveness is little changed following a change in a member country’s ‘essential’ competitiveness. As a result, a country’s ‘essential’ competitiveness and export performance are leveraged in a currency union, when compared to the case of the same country being outside the currency union and operating under freely floating exchange rates. A survey of developments regarding German ‘essential’ competitiveness within the Eurozone, indicates that the leverage afforded by a currency union to a member country’s ‘essential’ competitiveness, explains to a large extent Germany’s gain from the euro.

Keywords: competitiveness, currency union, Eurozone, euro, Germany, leverage, 'essential' and 'apparent competitiveness[comma separated]

JEL Classification: F02, F15, F39, F49, O52, O57, P16, P17