The Crisis, External Imbalances and Competitiveness in the Euro Area Giorgio Barba Navaretti, University of Milan and Centro Studi Luca d’Agliano LAC-EU Economic Forum 2013 Santiago, January 21 st 2013

2 Sources: EC and Eurostat. Notes: Countries are ranked according to GDP per capita in GDP per capita, relative to the EA, in PPS. EU growth, competitiveness and current account imbalances Capital inflows in the right direction, but not to the best use

External imbalances: Things change Source: Barues, Lawson, Radziwill and Lane, OECD WP

External Imbalances: Forecast of Decline in the Periphery Source: IMF, WEO, October2012

Macro Macro and then?? Debate on “competitiveness”: macro indicators Real Effective Exchange Rates (REER) Unit Labor Costs (ULC) Export shares Current Account (in % of GDP)

Correcting External Imbalances: Is Deflation Enough? Source: IMF, WEO, October2012 INDUSTRY?

Source: OECD and IMF. Data for 2011, except Spain 2010 Sectors? Manufacturing Trade Balance/GDP (%)

And micro? Nations and sectors do not produce, do not trade, do not compete; it is firms that produce trade and compete. BUT Firms?

Average firm size

What do we learn when we look at firms? THE EFIGE SECOND POLICY POLICY REPORT Differences in country patterns: German and French more sophisticated internationalisers Spain and Hungary lagging behind Italians, higher export propensity Firms characteristics affect internationalisation patterns in a remarkably similar way across countries Patterns explained mostly by firm characteristics  Country differ because they have a different industrial structure

Number of Destinations of Exports Many Firms in Few Countries, Few Firms in Many Countries Policy: How to shift these distributions to the right?

Source: Altomonte, Aquilante, and Ottaviano (2012) Global Operations and TFP Watch Out for the Causality Link Perspective: higher moments = reallocation of resources

Source: Altomonte, Aquilante, and Ottaviano (2012) Global Operations and TFP Three steps 1.Identify thresholds 2.Identify firms moving above thresholds 3.Identify features of firms moving above thresholds

What it takes to move up 1.Higher ex ante productivity 2.More human capital 3.No family managers 4.Less leverage 5.Foreign groups IMPACT ON TOTAL EFFICIENCY AND TRADE DEPENDS ON REALLOCATIVE EFFECTS BUT

Industrial structure (distribution of firm characteristics) important for trade imbalances Caveat: export not necessarily Nirvana => But clearly export competitiveness reflects efficiency and growth of industry and viceversa German miracle: did Germany have an industrial structure able to respond to changes in incentives?? = > Mittelstandt ? Fraunhofer? For other countries is firms growth important (Italy)? Nothing can be forced, but impediments to growth? And does reallocation of resources favour productivity growth? Finally what about industrial policy?? Implications

CountryTop 1%Top 5%Top 10%Top 20% FRA48,975,885,793,1 GER22,952,868,882,9 ITA50,469,778,186,8 SPA27,165,278,589,0 Share of Total Exports for Top Exporters, by Country The Happy Few Exports Very Concentrated

What Explains Export Status? Firms’ Features

A Simple Decomposition To quantify the importance of size and sector, apply to ITA, FRA and SPA the German structure (Germany only as benchmark; no suggestion to become German!) Keep fixed a country’s total employment in the manufacturing sector and shift workers across firms and sectors to replicate German structure How? Changing the weighting scheme as if sample firms in ITA, FRA and SPA were drawn from German population Importantly, keep a country’s export propensity and export share by size and sector classes

Export rise if we apply German industrial strucure, more in Italy and Spain than in France (Number of workers constant) Italy: Most of the action is size France and Spain, industry matters most

Switchers and the rest 2001/2 vs 2008/9 Source: Altomonte, Aquilante, and Ottaviano (2012)