Competitiveness and its Leverage in a Currency Union or How Germany Gains from the Euro

Abstract

A distinction is drawn between two notions of competitiveness. 'Essential' competitiveness focuses on the inherent developmental potential of an economy while 'apparent' competitiveness is largely determined by the exchange rate's influence on the current account. A currency union leverages (positively or negatively) a country's 'essential' competitiveness that diverges from the weighted average 'essential' competitiveness of the union as a whole, when compared with its competitiveness outside the currency union. Germany's recent economic success is largely due to the leverage of its relatively high 'essential' competitiveness by the Eurozone. The uncertainty regarding the economic prospects of both the weaker members and the Eurozone further enhances Germany's gain from the euro.

Keywords: Competitiveness, 'essential' competitiveness, 'apparent' competitiveness, leverage, currency union, Eurozone, euro, Germany

JEL Classification: E12, F02, F15, O52, P16