helped restoring cost competitiveness vis-à-vis a broader group of industrial countries. Of equal
importance is the development
of unit labour costs, which in the aftermath of re-unification rose
at a much faster rate than in the trading partners. In particular, the very high unit labour costs of
East Germany, drags down the pan-German competitiveness. Here, too, the situation appears to
be improving in recent years due to relative wage moderation. The adjustment appears,
however, to be very slow because other countries are also practising relative wage moderation.
The economic consequences of the loss in competitiveness
are obvious and can also be
modelled quantitatively (see Annex). Unification increased real wage costs in 1993 by over 7
percentage points compared to the hypothetical case of a Germany without re-unification. The
loss in competitiveness entailed by a real exchange rate increase of over 9%, results in the
model in a reduction in cumulative growth by 6½ % in 2000.
This pattern of a sharp loss and slow gain in trade competitiveness finds its reflection also in the
actual development of foreign trade. A large current account surplus of West Germany
disappeared when Germany was unified. This is accompanied by a relative fall in market share
of Germany’s exports. Unsurprisingly, the weakest element
can be found in East German
companies. In fact, the West German export sector remains highly competitive and runs, if
taken alone, a
de facto
current account trade surplus of roughly 4% of GDP and an estimated
trade surplus of around 7% of GDP. The East, by contrast, runs a huge current account deficit in
the order of 50% of its GDP, which is sustainable only as a result of West-East transfer
payments in the same order of magnitude.
A sectoral analysis of trade
suggests, however, that even the West might have longer-run
potential problems insofar as it is loosing its edge in the high-tech high-skill industries. In
combination with a relative decline in the capital intensity of exports, a continuation of this
trend would make Germany’s status as high wage country untenable. An analysis of intra-
industry trade flows also indicates that Germany might not take advantage
of the economic
potential of globalisation to the same extent as the other faster growing countries do.
Finally, the discussion of FDI shows that FDI flows into Germany are smaller than both
outflows from Germany and inflows into other countries. As opposed to the situation in trade,
an analysis of FDI is not so clear-cut. Nevertheless, it can be taken as a further indication that
business climate in Germany is falling behind that of other countries.
The analysis of these various aspects of Germany’s competitiveness allows three conclusions.
First, Germany’s trade performance remained behind that of its trading partners. Second, an
analysis of German competitiveness must clearly distinguish between the East, where
international competitiveness is still catastrophic and largely maintained by subsidies, and the
West, with only relatively mild problems. These might, however,
be growing, if companies do
not keep up with the latest international developments. Third, clearly the institutional aspects of
economic unification are at the heart of Germany’s competitiveness problems both in the West
and the East. The economic drain the intra-German transfers impose on the West are obviously
higher than the economic benefits the East derives from it. Any hope of lifting Germany’s
competitiveness must take the different needs of East and West as a starting point and set
policies accordingly. This requires, on
the one hand, a redirection of public funds and tax
incentives towards raising productivity rather than consumption. On the other hand, and
politically more difficult, it requires lowering unit labour costs to competitive levels. In concrete
terms this means in particular for the East that wages need to be set less according to economic
realities rather than principles of equal wages across the country.
