This paper assesses Germany’s external competitive position. This issue is particularly interesting in light of the substantial real appreciation of the deutsche mark in recent years, as indicated by several conventional measures of the real exchange rate, and the key role that exports have played in past economic recoveries.
Competitiveness is assessed from different angles. The paper first examines movements in several real exchange rate indices for Germany and reviews briefly their relationship to observed changes in trade flows. Against this background, the analysis seeks to shed further light on Germany’s competitive position by using the so-called constant market share approach. Finally, the paper briefly investigates the extent to which international competition may have narrowed German profit margins in tradable goods industries and offers a brief assessment of trade prospects based on recent developments in export order statistics.
The analysis demonstrates the differing picture of Germany’s external competitiveness painted by various indicators. A number of them have shown a deterioration in competitiveness, some by sizable margins. However, it also appears likely that Germany’s external competitive position is stronger than suggested by standard measures based on the manufacturing sector alone. An analysis of broader-based real exchange rate indices supports this conclusion. Moreover, the results of constant market share analysis suggest some positive competitiveness effects. These results are particularly significant for the period up to 1990 insofar as an absolute squeeze on profits at home was not readily apparent in the available data. They also suggest the need to take into account product mix, quality factors, and market orientation in evaluating the international competitiveness of individual countries.