France, Greece, Italy, Portugal, and Spain—Competitiveness in the Southern Euro Area

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.


In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

X. International Competitiveness: Looking at Direct Competitors1

A. Introduction

1. The common pattern of real appreciation observed during recent years in Greece, Italy, Portugal, and Spain has created concerns in policy and academic circles (Bini-Smaghi, 2007; EC, 2007; Roubini, 2007; and Papademos, 2007). It is argued that this real appreciation is associated with a loss of international competitiveness and could lead to a persistent period of slow growth, which has already materialized in the case of Italy and Portugal (Blanchard, 2006a and 2006b).

2. This study evaluates the evolution of international competitiveness, as measured by the ULC-based real effective exchange rate (REER2), incorporating two distinctive elements not considered in the current literature: a microbased approach of the structure of competitors and exports of services. For this purpose, we develop a complete methodology to estimate the REER that incorporates these two elements, and we take a closer look at their importance in France and in the four Mediterranean countries mentioned above (SEA-5). Our approach enriches the REER analysis by identifying more accurately each country’s direct competitors and providing an aggregate view of international competitiveness that encompasses the complete export sector.3

3. With respect to the structure of competitors, our methodology relaxes the common assumption used in the literature that all (or most) exported goods compete with each other in the destination market; we call this the homogenous-product approach (HPA). By contrast, we take a more microbased approach that analyzes countries’ international price competitiveness by defining different markets for different types of products and destinations, and aggregating market-level REER indices to obtain a country-level REER; we call this the differentiated-product approach (DPA).

4. Under the DPA, we identify each country’s direct export competitors at disaggregated categories of goods and services differentiating them by geographical markets at the country level. To illustrate the significance of the DPA, assume that country A exports textiles to country C, while country B exports cars to country C. In line with the HPA, focusing on competitors at an aggregate level—in the manufacturing sector for example, as this is the most common case in the literature—would suggest that countries A and B compete in market C, even though exporters of cars are not necessarily the relevant competitors of textile exporters. Furthermore, the HPA would imply that all manufacturing goods produced in country C are competitors of exporters to country C, regardless of the type of good that is produced in and exported to country C.

5. With respect to services, our approach incorporates the exports of services into the analysis of international competitiveness identifying competitors at disaggregated categories of services and markets, as in the case of goods. The importance (weight) of each product category is determined by its share in total exports.4

6. Our main findings suggest that the effect of considering both the more microbased structure of competitors (DPA) and export of services implies a modest lower real appreciation from 1998 to 2006 in the order of 2 percent to 3 percent for all Mediterranean countries, no significant change for France, and a somewhat lesser real depreciation of 1.2 percent for Germany—Germany is included in the analysis for comparison purposes (Table X.1).

Table X.1.

Net Appreciation Differential Since 1998: the Aggregate Effect of DPA Including Exports of Services

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Note: (a) figures are presented in percent; (b) these results are based on a difference in difference estimator that controls for the equivalent effect in the rest of 11 euro area countries (see Bennett and Zarnic, 2007).

B. The Evolution of REER

7. The evidence based on our methodology suggests that the REER in Greece appreciated by 12.7 percent from 1998 to 2006, in Italy by 27.6 percent, in Portugal by 2.6 percent, and in Spain by 16.3 percent, while in France it depreciated by 2.9 percent, and in Germany it depreciated by 9.8 percent. These figures are broadly in line with the figures computed by other sources.5


The Evolution of the REER

(DPA, G&S)

Citation: IMF Staff Country Reports 2008, 145; 10.5089/9781451834871.002.A010

8. In particular, the marginal effect of considering a more microbased structure of competitors in goods (DPA), in comparison with the observed appreciation under the HPA, implies a lower real appreciation of the order of 2 percent for Italy, Portugal, and Spain; 7 percent for Greece; and a lower real depreciation of 1 percent for France and Germany. When comparing the REER for goods with the REER for services, the results indicate that the REER for the latter appreciated less for Italy (3.4 percent), Portugal (2.1 percent), and Spain (0.9 percent); appreciated more for Greece (6.8 percent), and depreciated more for France (3.2 percent) and less for Germany (0.7 percent). As shown in Table X.1, the aggregated effect of incorporating both a microbased structure of competitors (DPA) and exports of services implies a lower appreciation of the REER for Greece (2.0 percent), Italy (2.8 percent), Portugal (2.4 percent), and Spain (2.3 percent); a marginally higher depreciation for France (0.1 percent) and lower depreciation for Germany (1.2 percent). These results are robust to a variety of additional tests and controlled for the equivalent effect observed in the rest of eleven euro area countries (see Bennett and Zarnic, 2007 for more details).

9. We perform a robustness check of our results comparing our estimate of the REER under the HPA with the standard IMF-WEO estimates of the REER, which is the closest source to our methodology that includes the latest developments in the literature and uses the HPA. The results for all six countries suggest a minimal difference of less that 1 percent.

C. The Profile of Competitors

10. The microbased methodology proposed in our study also allows a quantitative assessment of each country’s profile of competitors. Such evidence provides information about the exposure of each country to its key competitors around the world—for example, the exposure to emerging competitors like China, a country that has shown a strong pattern of productivity and trade growth, or the exposure to countries facing significant changes in their cost structure, such as the wage moderation observed recently in Germany or the realignment of the exchange rates observed in the U.S. during recent years. Our definition of markets also captures the potential vulnerability of each country’s sectors to altering market conditions in competitors’ sectors beyond country-level conditions.

11. For all six countries, the bulk of competition comes from the advanced and emerging economies, representing on average 95 percent in goods (except for Greece 92 percent) and 98 percent in services (except for Germany, 96 percent). Since the late 1990s, there has been a change in the composition towards greater importance of emerging economies, which represented in 2005 14 percent of overall exposure to competition in goods for Spain, 16 percent for France, 18 percent for Germany, 19 percent for Italy and Portugal, and 22 percent for Greece (Table X.2). China appears as the most important competitor in goods for all countries, representing at least half of the increase in the importance of emerging economies.

Table X.2.

The Structure of Competitors: Goods

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Note: (a) change in percentage points refers to the change in importance of competitors between 2005 and 1998.

12. Among the advanced economies, the euro area countries represent 59 percent of the competition in goods faced by Spain and Portugal, 49 percent for Italy and France, 47 percent for Greece, and 41 percent for Germany—exhibiting a declining trend since 1998 in the range of 1 percent point for all countries, which is less than the pattern observed for the aggregate of advanced economies. This indicates that Spain and Portugal are more exposed to euro area competition and therefore less exposed to changes in the value of the euro.

13. From a disaggregated point of view, the four Mediterranean countries compete mainly in low- to low-medium technology sectors with China—the main emerging market competitor—while France and Germany’s competition with China is balanced between low-to low-medium technology sectors and medium-high to high technology sectors.

14. In services, emerging markets represent on average about one-third of their importance in goods, showing a similar increase in recent years although to a lesser extent (Table X.3). From 1999 to 2004, the composition has shifted to emerging economies in the range of 3 percent for Germany, Greece, and Italy; 2 percent for France and Portugal; and 1 percent for Spain. The data suggest that China does not appear as an important competitor in services.

Table X.3.

The Structure of Competitors: Services

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Note: (a) The key five EE competitors for Greece are South Korea, Turkey, Hungary, Czech Republic, Hong Kong; for Italy are Hungary, Turkey, Czech Republic, South Korea, Hong Kong; for Portugal are Turkey, Czech Republic, Egypt, Hungary, Mexico; for Spain are Turkey, Czech Republic, Egypt, Hungary, South Africa; for France are South Korea, Turkey, Hong Kong, Hungary, Czech Republic; and for Germany are South Korea, Hong Kong, Czech Republic, Turkey, and Hungary.

15. Among the advanced economies, the euro area countries represent 60 percent of competition in services faced by Portugal, 50 percent for Italy, 48 percent for Spain, 42 percent for France, 41 percent for Germany, and 37 percent for Greece—exhibiting a nil trend since 1998 for all countries except for Spain and Germany for which euro area competition has declined by 6 and 5 percentage points, respectively. These figures should be read with caution given the incomplete availability of the data for bilateral trade of services (see footnote 4).

16. See Table X.4 (goods) and Table X.5 (services) for the list of the top 10 competitors for each country with their corresponding weights.

Table X.4.

Main Competitors in 2005: Goods

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Table X.5.

Main Competitors in 2004: Services

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17. In conclusion, we find that our REER estimates broadly follow the standard measures available in the literature, which neither account for a microbased structure of competitors nor the services sector. However, our results suggest a common pattern of higher international competitiveness in the range of 2-3 percent for Italy, Portugal, and Spain and substantial differences for Greece of the order of 7 percent for each of these two elements analyzed separately. With regard to the profile of competitors, the bulk of competition still comes from the advanced economies, especially from the euro area. Nonetheless, the importance of China as competitor is growing substantially. With respect to services, the profile of competitors is much more distributed towards advanced economies and has shown less dynamism towards emerging countries.


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Prepared by Herman Bennett and Ziga Zarnic (LICOS - KU Leuven).


The concept of REER is the most commonly used measure of international competitiveness and is frequently used in policy and academic discussions. See Agenor (1995), Catao (2007), Chinn (2006), Fung and Klau (2006), Marsh and Tokarick (1996), Neary (2006), and Rogoff (1996) for further references to the concepts of REER and real exchange rate.


This study is based on Bennett and Zarnic (2007), which presents the complete description of the methodology, data and the full set of results. Due to lack of consistent data across countries, our analysis centers on the external markets where each country competes with local producers as well as with other foreign exporters. Our analysis suggests that incorporating internal market competition to this framework does not change the conclusions of this study (differences are below 1 percent).


The available data on disaggregated bilateral trade in services is not as complete as the data for trade in goods, and therefore, our estimates of the REER in services are limited to the sample of trade flows available. The average coverage of bilateral trade is 89 percent of services exports for Greece, 70 percent for Italy, 83 percent for Portugal, 59 percent for Spain, 80 percent for France, and 54 percent for Germany. The coverage for goods is above 90 percent for all countries. Note also that the share of total exports of services in total exports is 66 percent for Greece, 20 percent for Italy, 28 percent for Portugal, 32 percent for Spain, 21 percent for France, and 14 percent for Germany. Our complete data set has over 36 million observations and includes prices data from 1995 until 2006; bilateral trade data for goods from 1995 to 2005; and bilateral trade data on services from 1999 to 2004. We compute the results for services from 1998 to 2006, for which we extrapolate the information observed in trade of services during 1999 and 2004 into 1998 and 2005, respectively.


The standard IMF-WEO estimates of the REER (based on Bayoumi, et al 2005)—the closest source to our methodology that includes the latest developments in the literature and uses the HPA—indicate a real appreciation of 13.6 percent for Greece between 1998 and 2006, 28.9 percent for Italy, 3.6 percent for Portugal, 18.6 percent for Spain, and a real depreciation of 3.5 percent for France and of 11.3 percent for Germany. Our estimates as well as the IMF estimates reported include ULC data as of August 23, 2007.