Euro zone crisis: It’s Germany’s fault

November 7, 2011

The reigning narrative of Europe’s financial turmoil is that profligate European states, agglomerated all too offensively by a swine-referenced acronym, are forcing the continent’s wealthy, prudent northern countries to come to their rescue. Not so, according to two policy experts who spoke this week at a conference on the euro zone crisis at the University of Austin’s Lyndon B. Johnson School of Public Affairs.

They argue that labor reforms in Germany prevented the wages of manufacturing workers from rising after monetary union had been completed, making the country more competitive at the expense of its southern peers. Joerg Bibow, a professor of economics at Skidmore College, gives his view of events:

Germany’s wage trends have been the most important cause of the euro zone crisis. Those wage trends created an asymmetric shock that destabilized Europe.

This hollowing out of the rest of Europe at the expense of Germany’s workers and to the benefit of its prospering corporate sector only lasted so long because of the insatiable, debt-fueled demand of the American consumer, Bibow said.

Some market analysts have argued that the euro itself is a backdoor stimulus for Germany, because monetary union has kept the common currency much lower than the deutschmark would be if Germany’s trade surpluses had been accumulated outside the EMU.

Heiner Flassbeck, a former German government official who is currently a director at the United Nations Conference on Trade and Development, says the economic leg up goes a step further. The way he sees it, monetary union is effectively a commitment by various nations to having the same inflation rate over time. Yet while inflation in other European nations converged toward the European Central Bank’s 2 percent target, Germany’s dipped even further – in great part because wages were not allowed to rise in line with business productivity.

One country got it absolutely wrong. That country was not Greece, it was Germany. Due to German wage-cutting, Germany adopted a beggar-thy-neighbor export model.

2 comments

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My two cents: Being a German employee myself, I can tell you how the self-righteous German government and the even prouder German companies have generated an edge over their European competitors. It is in fact very simple: They have disregarded EU regulations on a large scale; they have cheated on their own employees; they have conned their own fellow-citizens. And still do so. Just three examples:

1) While all other European countries – including even Britain – now adhere to the EU regulation concerning equal pay and equal treatment for temporary agency workers, the German government simply does not honour this rule and has found a quasi-legal workaround. The German government closes its eyes to the standard practice of German temp agencies tricking its own citizens – and many foreign workers – into signing work contracts including a waiver on the EU’s equal pay and equal treatment directive. The low wages of temp agency workers (approx. 35 – 45 percent below average in Germany!) have not only driven down Germany’s unit labour costs and thus miraculously increased its competitive trade advantage, but were also used to threaten permanent staff to behave docile and to put pressure on the German trade unions so as to bring down wages in general. This is the Pudels Kern (the gist of the matter) of the miraculous German competitive advantage: A fair swindle. While this cheat is now coming under increased scrutiny finally, the latest trend goes to – formally – outsource whole business divisions into (underpaid) service companies (which in itself is nothing to write home about), without, however, altering the command structure or even the physical job location. Different method, same results: lower German wages, cheaper products, higher exports, increased competitive advantage over other euro countries, diminished stability of the common currency.
2) In contrast to most other European countries Germany still does not have a general minimum-wage scheme. While it is, in theory, a legitimate political decision not to have one, most euro countries have introduced minimum-wage schemes in order to avoid seeing wages fall below subsistence level. This exactly, however, is happening in Germany as a practical consequence of not having such a directive, with gross wages falling as low as 4 euro per hour. The result of the missing minimum-wage policy is, of course, that Berlin (read: German taxpayers and employees) has to subsidize more and more of Germany’s underpaid – mostly temp agency – employees: their wages; their social security contributions; their employers; their products! And thus, in turn, it makes German taxpayers and German employees subsidize their own exports, e.g. to more profligate (read: humane) mediterranean euro countries, increasing regional trade imbalances and destabilizing the euro.
3) Whereas many countries, including even India, for instance, assist their citizens in coping with high energy and gas costs, Germany does not only tax energy to a high proportion, but even goes so far – be it the companies’ or be it the government’s idea – as to make private German citizens actually pay for the electricity bills of German companies and corporations, thus, again, subsidizing German exports, increasing Germany’s competitive advantage, creating asymmetric trade balances inside the euro zone and, you know it already, destabilizing the common currency.

And there you go: Greece has cheated, Germany has cheated. Both have violated genuine EU rules, the former one more in the legal sense, the latter one more in the real sense – and much more efficiently. While Greece has triggered the European sovereign crisis, Germany has caused it. That’ll be euro 4 trillion.

Posted by SchumannGermany | Report as abusive

As long as Greece is not considered as a part of Germany, and so on for all member countries, as long as there is discrimination of language, culture, industry base or religion through the borders, and as long as Germany or France or any other bordered geographical authority for people accumulation releases the euro and limiting to euro based common market, and requests the money back with interest without same opportunity of production thru same level of competitiveness with education, beginning capital, knowhow, or else with even manners of living: then it is the problem of the total union or the Germany being more decisive on the laws and operation decisions of the so called Union. The potentials shall be same for sisters or brothers, else one or the other with crunch the weak one.
Weak things can only be strong with unions, as long as they are unified without any gap.
It has been a good lesson for the new parties that would like to enter to the union, that just because of the culture or borders, but without competitive advantage entering to the union will force the party itself to face hazardous situation as Greece had.
Either there is no border or there is, or as near future will show that the unemployed Greeks, Italians and even Spanish will migrate more to the very low qualified jobs inside borders of Germany or France.
Entering the union to such countries within the existing situation will create polarisation and more competitiveness to European Union as long as the mass migrations are accepted. Else the Union has to have turmoil in memberships.
regards,

Posted by alpersays | Report as abusive