SOCIETÀ ITALIANA DI DIRITTO ED ECONOMIA
Walter Paternesi Meloni (Sapienza University of Rome)
Abstract
Following the outbreak of the 2008 crisis, the Mediterranean economies, specifically Greece, Italy, Portugal, and Spain, undertook a series of structural reforms aimed at correcting their external imbalances. The reforms primarily included substantial wage devaluation, leading to a decrease in nominal unit labour costs (ULCs), and a strengthening of traditional fiscal conservatism, with the aim to limit internal demand and, consequently, deflate the economy. These changes marked a shift from a growth model reliant on debt to one centred around exports (Hein et al., 2021). Interestingly, these reforms bore a resemblance to those adopted by Germany from the mid-1990s to the mid-2000s, leading Germany towards a mercantilist export-driven growth trajectory.
Taking a step back to before the crisis, however, it is noteworthy that three of these countries (Greece, Portugal, and Spain) exhibited vigorous growth rates and significant reductions in unemployment. In contrast, Italy experienced modest economic growth rates and limited job creation. However, despite the positive economic indicators, the trade balance in all four Mediterranean economies worsened during the 2000-2008 period.
The mainstream explanation offered by Comparative Political Economy (CPE) to this trend focuses on the evolution of price competitiveness and relative ULCs. In this respect, it is argued that the Mediterranean variety of capitalism (also known as ‘mixed market economy’) lacks coordination in wage bargaining (Molina and Rhodes, 2007); this provoked uncontrolled wage growth both in the sheltered and exposed sectors to international trade, that is, a deterioration in cost/price competitiveness. On the flip side, Germany – together with other Northern/Continental European countries – is recognised as a ‘coordinated market economy’, possessing institutional mechanisms to manage wage growth (and keep it in line with or behind productivity growth); this is facilitated by its pattern bargaining wage-setting system, where the exporting sector establishes the framework for wage increases across the broader economy. This approach enables producers to maintain cost competitiveness (Traxler and Brandl, 2012). Moreover, following the reunification process, Germany grappled with significant economic challenges, including low growth rates, elevated unemployment, and a decline in the international competitiveness of its manufacturing sector. In response to these issues, the primary political strategy involved wage devaluation, achieved through the progressive deregulation of industrial relations systems and the liberalisation of the labour market (Baccaro and Benassi, 2017; Rathgeb and Tassinari, 2022). The outcomes of these institutional changes were clear-cut: a divergence in cost and price competitiveness, resulting in a slowdown in export growth and an increase in imports for Mediterranean countries. Conversely, for Germany, exports emerged as the primary driver of growth, outpacing imports by a significant margin. These dynamics were further accentuated with the advent of the euro, as nominal exchange rates among Euro area (EA) members equalised (Höpner and Lutter, 2018).
A supplementary explanation provided by the CPE literature for the emergence of external imbalances in the EA revolves around capital flows. The introduction of a single currency effectively enabled lower real interest rates for economies characterised by high inflation, such as those in the Mediterranean ring. Consequently, against the backdrop of robust domestic demand growth and substantial returns in the construction sector, there was a surge in foreign capital inflows, contributing to the escalation of both public and private indebtedness (Stockhammer, 2011; Pérez, 2019). The onset of the 2008 crisis resulted in a sudden stop of capital inflows to economies reliant on debt, marking the demise of a crucial pillar in their growth model (Köhler and Stockhammer, 2022). Subsequently, these economies experienced negative output growth rates, a sharp increase in unemployment, and a swift improvement in their trade balance. In response to the crisis, European institutions mandated the liberalisation of labour markets in Mediterranean countries, coupled with the enforcement of fiscal austerity measures. The objective was to recalibrate their growth models by reclaiming cost and price competitiveness. Paradoxically, the European institutional framework ended up exacerbating the recession rather than mitigating it (Stockhammer, 2016).
Actually, ten years after the implementation of such policies, it can be said that they were inefficient for both income per capita and employment growth, and that they provoked the so-called ‘lost decade’ for Southern European countries. Nevertheless, it is worth noting that these countries have managed to shift towards a more balanced growth model, in which exports play a relevant role: the post-crisis expansionary phase is indeed marked by a positive development in the trade balance for Mediterranean economies. While wage restraint and austerity policies contributed to improving the trade balance through the collapse in domestic demand and imports (Hein et al., 2021; Köhler and Stockhammer, 2022), the impact of these institutional reforms on the trajectory of exports is a subject of considerable debate. On the one side, some authors argue that cost and price competitiveness play a crucial role in driving export growth; on the other side, some observers assert that non-price factors, such as quality, technological sophistication, or aspects like firms’ distribution channels and marketing strategies, carry greater significance for achieving commercial success. According to the latter view, attempting to replicate the German growth model through internal devaluation is futile because Germany’s international competitiveness is rooted in non-price factors, namely its superior industrial specialisation and technological dominance (see Simonazzi et al., 2013; Storm and Naastepad, 2015a; Celi et al., 2018; Gräbner et al., 2020a; Herrero and Rial, 2023a). Consequently, from this perspective, the export-led growth in the Mediterranean region is primarily driven by curbing domestic demand and may be unsustainable in the long run.
Against this backdrop, this research contributes to the ongoing discussion in two ways.
First, we analyse indicators of institutional change (e.g., social spending, labour market norms and regulations, the role of trade unions) for Germany and Mediterranean economies, to understand whether a process of convergence towards the German model is indeed underway.
Second, we move to the empirical counterpart of this debate, that is the impact of these processes of institutional and macroeconomic changes on international competitiveness. To do that, we compare and contrast the main drivers of exports in Germany and Mediterranean economies by differentiating based on export sophistication. In particular, we distinguish between cost and non-price competitiveness factors, and study their evolution throughout the 1995–2018 period in the manufacturing sector (tradable commodities are predominantly manufactured goods), which is in turn disaggregated into four groups by technological intensity (high tech, medium-to-high tech, medium-to-low tech, low tech). Furthermore, a subsystem approach to the input-output analysis is employed (Pasinetti, 1973; Montresor and Vittucci Marzetti, 2011): in so doing, all domestic activities that contribute, directly or indirectly, to the production of final manufactured commodities are considered. Thus, it becomes feasible to examine the entire domestic value chain, taking into account the various channels through which all activities might have played a role in contributing to export growth.
On aggregate, our findings indicate that the new role of exports in economic growth in Mediterranean economies has been influenced by enhancements in both price and non-price competitiveness factors. However, these economies still fall behind Germany and other core European countries, particularly in terms of non-price competitiveness. This implies that their post-crisis export performance is significantly influenced by the changes in relative costs, and their favourable trade balance is closely linked to wage restraint (which has also contributed to restraining domestic demand, income, and imports).
Some policy insights also emerge from our work. While wage moderation represents the easiest and most immediate way to enhance international competitiveness, especially when adjustments in the nominal exchange rate are ruled out, as is the case in the EA, this strategy is likely to be unsustainable as it could compromise other sources of aggregate demand. Moreover, it raises concerns about income redistribution from capital to labour after many years of wage moderation. On the contrary, a coordinated fiscal expansion and/or internal revaluation, particularly in Germany with its significant trade surplus and higher productivity, could stimulate output in all countries without generating excessive external imbalances or undesirable income polarisation. Furthermore, the recognised importance of non-price factors suggests a different strategy, one that is diametrically opposite to structural reforms, job precariousness, and wage moderation, which result in increased income inequality. To achieve a sustainable path of growth in Mediterranean economies, selective industrial policies aimed at fostering non-price competitiveness and the development of strategic sectors appear to be a more efficient alternative to cost compression for an export-led growth model. This approach could also contribute to resolving the observed macroeconomic dichotomy in Europe between Northern and Southern countries.