European Economy. Economic Papers. Germany's growth performance in the 1990's

3. Structural issues
3.1 Competitiveness, trade and FDI
3.1.1 Development of competitiveness indicators in the 1990s
Competitiveness is a complex notion that could be analysed for the economy as a whole but also
for different sectors and industries and individual companies. Whether the measurement of
competitiveness at the level of nations is appropriate has been at the centre of academic
discussions in the 1990s.
35
In the case of Germany, an additional dimension comes into focus:
the competitiveness of two groups of states (Länder), notably the ten West German Länder and
the five new East German Länder plus Berlin (West and East). This sub-section deals with
competitiveness of the German economy as a whole and with the impact of re-unification on
Germany’s longer-term competitive position.
The competitiveness of German companies depends on a mix of price and cost determinants and
of other factors like product quality, ancillary services or the degree of flexibility. As the latter
factors are difficult to measure quantitatively, prices and costs indicators attract most of the
attention. Among these, the real effective exchange rate (REER) is one of the most widely used
indicators. The real exchange rate between two countries is calculated by multiplying the
nominal exchange rate with an index of relative prices or costs. For a group of countries,
weighing the bilateral real exchange rate by trade shares and summing up yields the REER.
Depending on the group of reference countries and/or on the choice of the price/cost measure
these REERS may differ. However, variations in the price/cost indicator should not
fundamentally change the picture at least as far as the trend is concerned.
36
Developments vis-à-vis a group of 24 industrialised countries
Figure 3.1 shows REERs for Germany vis-à-vis 24 industrial countries for the period 1988-
2000 using the following price and cost indices: the deflator of private consumption, the GDP
deflator, the price deflator of goods and services exports and two nominal unit labour cost series
(for the whole economy and for the manufacturing sector).
37
As expected, the resulting REERs
show a high degree of correlation. Peaks and troughs are most accentuated when unit labour
costs are used as a price/cost measure.
The development over time allows to distinguish five sub-periods:
•
the