Thursday, December 3, 2015

Simon Wren-Lewis on German undercutting of EZ wages


Simon Wren-Lewis - was German undercutting deliberate?

Here's Simon Wren-Lewis (who's a British economist, not an American media clown) on how the German internal devaluation contributed to the EZ crisis:
It is hard to overstate the importance of all this. German employers and employees connived in a policy that would take jobs away from their Eurozone partners. Whether this was done knowingly, or because of a belief is some kind of wage-fund doctrine, or something else I do not know. But it makes Germany, a country with perhaps a unique ability to cooperate on an internal devaluation of this kind, a dangerous country to form a currency union with. The thing I find extraordinary about all this is that Germany’s neighbours seemed to have let it happen without a whisper of recognition or complaint.
And if you weren't paying attention yesterday, he's commenting on this report by Peter Bofinger, one of the five members of Germany’s Council of Economic Experts, who is German and therefore not an American:
An EZ Crisis narrative that does not that does not account for the effects of the German wage moderation is incomplete. Germany is by far the largest EZ economy and it is a very open economy with strong trade links to all other EZ member states. It would be difficult to explain why such a strong internal devaluation, which is regarded as a key determinant of Germany’s success story in the 2000s (Dustmann et al. 2014), did not have significant repercussions for the rest of the EZ.

Wage moderation led to decline in unit labour costs and to a German HICP inflation rate below the ECB’s target value. As this compensated for above target inflation in the rest of the EZ, the ECB was not able to increase its policy rate although there were signs of overheating in the deficit countries. Wage moderation caused stagnation in German domestic demand, which had a negative impact on the German demand for goods and services from the rest of EZ. Wage moderation improved the price competitiveness of Germany gradually which led to a deterioration of the bilateral current account of the rest of the EZ. Finally, wage moderation caused higher profits in the corporate sector, which led to a higher saving rate of this sector.
Read the article.

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