CMEs: Profiting from the BICs’ Industrialization

Abstract

This chapter discusses the impact of the rise of the BICs on the CMEs’ external trade balances. It is shown that the CMEs, and Germany in particular, have accumulated significant trade surpluses not only inside the euro area but also extra-regionally, and that they have been able to re-orient their exports after the crisis toward the rest of the world. We argue that labor cost dynamics and wage-setting institutions cannot satisfactorily explain the remarkable extra-regional trade performances of the CMEs. This success is to significant extent related to non-price competitiveness factors, more specifically their trade structures in terms of product composition and quality, rooted in the specific skill and innovation regimes of northern euro area member states. These factors have allowed the CMEs to suffer less and profit more from the rise of the BICs than the other euro area member states. Indirectly, they have managed to relatively escape the negative effects of the appreciation of the euro as a consequence of monetary policies of emerging markets. Directly, their production has confronted relatively limited export competition from and high import demand by the BICs. After the crisis, their export strength has allowed them to deflect the adjustment burden completely to the southern euro area and shape reform of the EMU in a way that further reinforces their export interests in the short term, while generating negative spillovers and contradictions in the longer term.