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Analysis

Cost cuts and market share

by Ben Robinson

Thu 28 Jan 2016

Austria meeting Enlarge Chart loading Image

Despite substantial cost-cutting efforts, southern European countries have failed to achieve significant increases in export market share since the financial crisis, according to data collated by the Österreichische Nationalbank for the period 2008-14. According to the statistics, discussed at the OMFIF Economists Meeting at the OeNB headquarters in Vienna on 25 January, Cyprus and Greece have fared the worst, losing market share of 3% and 11% respectively despite cutting unit labour costs by around 5% (see chart).

Most euro area countries increased unit labour costs over the period, with a roughly 12% increase across the euro area after the financial crisis. However, necessary economic rebalancing has plainly failed to spark any substantial increase in activity. The data may support those who argue that the euro area is suffering from inadequate overall demand and requires additional fiscal stimulus. Many countries’ post-crisis strategy of cutting costs through internal devaluations has been counterproductive, depressing domestic demand while failing to provide compensation in the form of additional exports.

The data display some slightly surprising conclusions. Slovenia, the Netherlands and Belgium have registered relatively large increases in labour costs, but have marginally increased market share. Somewhat less unexpectedly, the rise in unit labour costs has come at the expense of market share in France, Italy, Malta, Austria and Finland.

Sectoral differences are important here. Manufacturing labour costs in Finland are below the euro area average, but the country has lost the largest total market share. This is largely due to a fall in export demand as a result of low euro area growth and a sharp contraction in exports to Russia, which funnels through to increased unit labour costs. Unit labour costs have risen more substantially in sectors such as services, construction and public sector employment, which are less trade-intensive, and therefore contribute to higher unit labour costs relative to export market share.

The best performer on both labour cost reduction and market share growth has been Ireland, which has reduced costs by around 8% and increased market share by 15%. Yet as a result of the 42% increase in labour costs between 2001 and 2008, its costs are falling from a comparatively high level. In central Europe, Slovakia and Germany have performed well, reflecting in part the importance of supply chains between Germany and its cheaper central and eastern European neighbours to support production and exports there.