Europe

GLOBAL INVESTOR 1.14 — 42 1999
Has Spanish
competitiveness
become more
German?
01_Harmonized competitiveness
indicators
The ECB (European Central Bank) publishes
competitiveness indicators (the lower the value,
the better). Germany has improved its competitiveness
since the Hartz reforms of 2005.
Spain’s competitiveness has worsened since
joining the Eurozone, but improved since the
recession and following the reform. Since then,
the country has been regaining ground
vis-à-vis Germany. Source: ECB, Datastream, Credit Suisse
120
110
100
90
80
2001 2003 2005 2007 2009 2011 2013
Spain Germany France
n the late 1990s, the German economy
showed little of the dynamism that
characterizes it today. Unemployment
rose fairly steadily after reunification in
1990, despite comparatively robust GDP
growth during that decade. An ambitious reform
program termed “Agenda 2010” (a.k.a.
the Hartz reforms), announced in 2003, tried
to address certain shortcomings of the labor
market. The Agenda 2010 legislation, most of
which had become law by 2005, modernized
the system of public employment agencies,
reduced regulation of certain forms of employment
(temporary employment, labor leasing),
lowered barriers to layoffs and tied welfare
benefits more closely to efforts to find
employment.
Labor market developments since re form
implementation have been impressive: the
number of employed individuals rose to an
all-time high of 42.1 million from 39 million by
the end of 2005, while the unemployment
rate declined from 12.1 % to a post-reunification
low of 6.7 % by May 2014. Although
these numbers are indeed impressive, critics
of the reforms argue that the quality of the
new jobs created has been rather weak –
focused to a large extent on manual and
low-paid jobs. There may well be some truth
to this claim. For example, the number of employees
of so-called labor-leasing agencies
has increased substantially since the market
was opened up.
In response to these criticisms, the German
government is currently stepping back
somewhat from the spirit of the Agenda
2010 reforms, e. g. through the introduction
of a federal minimum wage and discussions
about lowering the retirement age for certain
types of employees.
The 2012 Spanish labor market reform
While it took Germany several years to agree
on reforming the labor market, the euro crisis
forced Spain to follow a comparable path
within a much shorter period of time. One of
the key initiatives in this regard was the Spanish
labor market reform announced in February
2012. It had a significant impact on labor
costs. Indeed, the OECD estimates that more
than half of the 3.9 % decline in unit labor
costs between Q4 2011 and Q2 2013 can be
attributed to the labor market reform. Among
the key adjustments were improvements in
incentives for firms to hire as well as for individuals
to look for work, e. g. by reducing
severance payments and granting firms more
flexibility in adjusting the size of their workforce.
However, the reform fell short of (high)
expectations. We view the labor market reform
as an important step in the right direction,
but we would like to see further progress
on this issue. Still, the OECD estimates that
the undertaking is responsible for the hiring
of 25,000 employees with permanent contracts
each month, especially among smalland
mid-cap firms. We portray two Spanish
small caps on page 44.
Björn Eberhardt
Global Macro Research
+41 44 333 57 43
bjoern.eberhardt@credit-suisse.com
Javier J. Lodeiro
Banking & Insurance Research
+41 44 334 56 44
javier.j.lodeiro@credit-suisse.com
02_Unemployment rates
in Germany and Spain
Since 2005, the unemployment rate in Germany
has nearly halved, also supported by the Hartz
labor market reforms. Following the global
financial crisis, the Spanish unemployment rate
has shot up to levels beyond 25 %, well above
the previous peak in 1994. Encouragingly,
there have been early signs of improvement
in recent months. Source: Datastream, Credit Suisse
%
30
25
20
15
10
5
0
50
1992 1997 2002 2007 2012
Spain
Rank (out of 148)
1
7 5 7
22
29
22
29
Germany
03_WEF competitiveness
ranking puts Germany close
to the top, with Spain still
below its precrisis highs
Germany has been assessed as a very competitive
economy over the last eight years, without
any substantial variability in its ranking. Spain’s
competitive ranking has declined compared
with precrisis levels, but the 2012 reform and
the improved macroeconomic stability should
lift its ranking back up again. Source: WEF, Credit Suisse
22
29
7
23
33
2007 2008 2009 2010 2011 2012 2013 2014
Spain Germany Eurozone average
5
23
42
6
23
36
6
23
36
4
24
35