Compositional effects on productivity, labour cost and export adjustments. Bruegel Policy Contribution 2012/11, June 2012

Sectoral shifts, such as shrinkage of low labour productivity and the low-wage construction sector, can lead to apparent increased aggregate average labour productivity and average wages, especially when capital intensity differs across sectors. For 11 main sectors and 13 manufacturing sub-sectors, we quantify the compositional effects on productivity, wages and unit labour costs (ULCs) based and real effective exchange rates (REER), for 24 EU countries. Compositional effects are greatest in Ireland, where the pharmaceutical sector drives the growth of output and productivity, but other sectors have suffered greatly and have not yet recovered. Our new ULC-REER measurements, which are free from compositional effects, correlate well with export performance. Among the countries facing the most severe external adjustment challenges, Lithuania, Portugal and Ireland have been the most successful based on five indicators, and Latvia, Estonia and Greece the least successful. There is evidence of downward wage flexibility in some countries, but wage cuts have corrected just a small fraction of pre-crisis wage rises and came with massive reductions in employment even in the business sector excluding construction and real estate, highlighting the difficulty of adjusting wages downward.

Productivity, labour cost and export adjustment: Detailed results for 24 EU countries. Bruegel Working Paper 2012/11, 12 July 2012

As a background document for Bruegel Policy Contribution 2012/11 ‘Compositional effects on productivity, labour cost and export adjustment’, this working paper presents detailed results for 24 EU countries on: • The sectoral changes in the economy; • The unit labour costs (ULC) based real effective exchange rate (REER) and its main components; • Export performance. • The ULC-REERs are calculated: • For the total economy, the business sector (excluding agriculture, construction and real estate activities), and some main sectors; • Using both actual aggregates and fixed-weight aggregates, as the latter are free from the impacts of compositional changes; • Against 30 trading partners and against three subsets of trading partners: euro-area, non-euro area EU, non-EU.

Inflation-Targeting, Flexible Exchange Rates and Macroeconomic Performance since the Great Recession. CEPS Working Document No. 394, March 2014

Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? This paper answers this question in the affirmative. Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other monetary regimes, predominantly countries with fixed exchange rates. Part of this difference in growth performance reflects differences in export performance during the initial years of the crisis, which in turn can be explained by real exchange rate depreciations. However, IT seems also to confer other benefits on the countries above and beyond the effects from currency depreciation.

Why is the Greek economy collapsing? A simple tale of high multipliers and low exports. CEPS Commentary, 21 December 2012

In an attempt to understand why the Greek economy is collapsing, this Commentary points out two key aspects that are often overlooked – the country’s large multiplier and a bad export performance. When combined with the need for a large fiscal adjustment, these factors help explain how fiscal consolidation in Greece has been associated with such a large drop in GDP.

What makes Greece special? CEPS Commentaries, 19 March 2014

The news from Greece these days has been dominated by the announcement that the government achieved a primary budget surplus in 2013. While acknowledging that this is indeed a highly laudable accomplishment, Daniel Gros points out in a new commentary that a more important news item, which has received much less attention, is the fact that Greece exported less in 2013 than in 2012. After considering various textbook causes for this poor export performance, he concludes that the only explanation must be that the Greek economy has remained so distorted that it has not responded to changing price signals.

Why Greece is different. CEPS Commentary, 22 May 2015

With Greece’s economy tanking again, the country’s government is convinced that it is the victim of the wrong treatment in the form of excessive austerity and is calling for a renegotiation of the bailout deal it made with its international creditors. In Daniel Gros’ view, however, this narrative overlooks the fact that the approach worked in other peripheral countries: Portugal, Ireland, Spain and even Cyprus, are all visibly recovering. As he points out in this CEPS Commentary, it was their strong export performance which allowed these countries to escape the austerity trap and he accordingly urges Greece’s policy-makers to focus their attention on stimulating exports rather than only discussing the budget.

Europe's exports superstar - it's the organisation! Bruegel Working Paper 2015/05, 15 July 2015

What explains Germany’s superb export performance? Is Germany’s export behaviour very distinct compared to other European countries? The authors explore the organisational responses to competition of 14,000 exporting firms in seven European countries. The paper examines the export business model of the median exporter and of the top one percent exporters in each country, accounting for 20 percent to 55 percent of total exports. What do these firms do to become superstars? The authors find, first, that the export market share of the median exporter in each of the countries to the world more than tripled (in some cases the export market share increases tenfold) for firms that combine decentralised management with offshoring of production to low-wage countries. Exporters which abstain from any organisational adjustment do very badly. Decentralised management provides incentives for workers for product improvements allowing exporters to compete on quality. Offshoring production to low-wage countries reduces costs allowing exporters to compete on price. Second, we find that Germany is the leading quality exporter in Europe followed by Austria and Spain. Among the top 10 percent of exporters there is no single firm with low quality in Germany and Austria, which suggest that decentralised management has provided incentives for quality in these countries. Third, Germany’s exports are less vulnerable to price increases, while exports from France and Italy respond strongly to price changes, and thus costs reductions via offshoring benefits these countries most.