The German problem, a world problem*
In a recent analysis, we pointed toward the links between the “German miracle,” which came in part due to stagnant wage growth and impeccable export performance, and the “Greek drama.”
We noted that the ills of the eurozone have to be seen in a wider perspective that encompasses both. So, the issue is one of balance-of-payments – similar to the problems experienced by many other economies and global capitalism itself.
The Global Employment Trends 2012 report by the International Labor Organization (ILO) focuses on the “German side” of the problem elegantly.
“As German unit labor costs were falling relative to those of competitors over the past decade, growth came under pressure in these [latter] economies, with adverse consequences for the sustainability of public finances,” the report says. “Crisis countries were barred from using the export route to make up for the shortfall in domestic demand, as their manufacturing sector could not benefit from stronger aggregate demand in Germany.”
The ILO reminds us that the problem was inherited from the German reunification. As the 1990 unification brought a huge rise in unemployment, policymakers chose to address this issue by pressuring wages, while, starting in 1991, the Bundesbank tightened monetary policy to rein in inflation, especially in the east. This move led to the destruction of the European Monetary System in 1993, while also triggering an erosion of competitiveness due to the appreciation of the currency.
A decade later, the Gerhard Schröder government pressed the button on a series of “labor market reforms” which hurt real wages while boosting productivity. Such policies, amounting to an internal devaluation, took their toll on private consumption, while widening income inequalities. Meanwhile, the bright export performance of Germany (exports account for more than 50 percent of German gross domestic product) depended – partially – on booming demand in developing economies, led by China.
The duplication of “German-like” policies by other eurozone members will only exacerbate the recession in the eurozone, while they may also lead to unexpected political consequences. Plus, as Paul Krugman says, if everyone else runs huge trade surpluses like Germany, where will German companies export to?
A vital contribution comes from Marc Ostwald of Monument Securities. In his email, Ostwald reminds us of the “fundamental battle” between Germany’s vision of a federal Europe and the French desire for a centrist, dirigiste and bureaucratic Europe. This conflict has to be resolved first if Europe is to attain any form of closer fiscal union, he says.
Ostwald also points toward the huge risk that Chancellor Angela Merkel is running: There is a suspicion that she is “reverting to some of the worst and most despised forms of Prussian and Bavarian authoritarianism.”
The recent debate on Berlin taking over the finances of Athens, undoubtedly, adds fuel to such suspicions.
(*): This was a headline of an October 1962 article by Konrad Audenauer, published by Foreign Affairs magazine.