The electoral victory of Angela Merkel brings bad news to the rest of Europe. Without doubt it means the continuation of the national economic policies that have all the other euro zone countries suffering from recession. While the Christian Democrats and their Bavarian allies narrowly missed an absolute majority, the probability that a coalition partner would moderate austerity polices is close to zero.
The majority of people of euro zone Europe have suffered debilitating recession or severely reduced growth rates for half a decade. Even before economic disaster hit in 2008 growth performance was modest at best. The 2008 disaster came from “across the pond” as the British would say, the result of a collapse of the US financial sector. That collapse occurred as direct result of twenty years of financial deregulation championed, designed and funded by the great financial houses themselves. Four presidents qualify as accessories after the fact in this deregulation, Ronald Reagan, George Bush, Bill Clinton and George W. Bush.
While the disaster had “made in the USA” stamped all over it, its spread and persistence in Europe resulted and results from the policies of another major economic power, Germany. The governments of Germany must take substantial responsibility for the mediocre growth of the members of the European Union in the 19900s. I am not assigning these culpabilities to “Germany”, which is a useless abstraction in this context. I refer specifically to the policies of Helmut Kohl, Gerhard Schröder, Angela Merkel, and first and foremost the Bundesbank.
Chancellor Helmut Kohl presided over the second unification of Germany (the first occurring during the latter part of the nineteenth century). The Bundesbank convinced itself that the economic terms of the unification would generate inflation. To suppress the non-existence inflationary pressures, the Bundesbank embarked on a restrictive monetary policy that depressed growth in Germany, with spread effects through the other European Union countries. If Kohl had doubts about this policy by the Bundesbank, we have no record of them.
In 1998 the new Social Democratic government decided to restore growth, not by domestic demand expansion, but by what would soon be revealed as a mercantilist export strategy. To put it simply, the new government rejected a stimulus package that would have positive spillover effects within the European Union, preferring an export strategy that would come close to a zero-sum game. Some commentators stress the pro-export changes in German tax structure as the key feature of the beg-thy-neighbor strategy. Along with many others, I place greatest stress on the real wage repression that resulted from an agreement between trade unions and the Social Democratic government. The chart below demonstrates the consequence of this agreement.
Taking 2000 as the base year, real wages in Germany actually declined prior to the Global Financial Crisis. Over the same years they rose on average across the other euro zone countries, by over ten percent compared to 2000. For the European Union countries not in the euro zone (EZ), the increase was twice as much, by almost twenty-five percent in 2008 compared to 2000. It was the real wage repression in Germany, not higher productivity growth, which resulted in a dramatic shift from a current account deficit of about €40 billion in 2000 to a surplus of close to €200 billion in 2007.
Real private sector compensation per worker, Germany, euro zone (EZ) countries excluding Germany & non-EZ EU countries, 2000-2013 (2000 = 100)
All three wage levels for 2000 set to zero; i.e. they were not equal to each other. “EZ w/o Germany” does not include Cyprus or Malta, for a total of 14 countries.”non-EZ EU” countries are Czech Republic, Denmark, Hungary, Norway, Poland, Sweden, United Kingdom. Source: www.oecd.org/statistics/.
In the media we are told that those rising real wages in the other euro zone countries were the cause of the intra-EZ trade rather than the wage freeze in Germany. Some I the media even commend “Germany” for its frugality while berating the other countries for excessive and uncompetitive wage growth. This a very strange view, to say the least. First, in a democratic country the purpose of economic policy is to promote the general welfare. Those receiving wages and salaries constitute the vast majority in every European country.
To commend a government for freezing real wages is to praise it for denying economic improvement to the vast majority. To criticize a government for overseeing real wage increases implicitly endorses growing inequality and poverty. If real wage increases generate trade imbalances in the euro zone, there is something fundamentally flawed in the organization and rules of the European monetary union. An economic and political union does not promote the general welfare if increasing welfare of the majority undermines competitiveness.
Second, criticizing wage increases implies that all countries in the euro zone should pursue wage repression. In addition to being The Economics of the 1% (see below*) in its most flagrant form, this criticism represents an obvious “fallacy of composition”. If ever there were a case in which what succeeds in one country fails when done in all countries, this is it.
A wage freeze throughout the euro zone would depress domestic demand, undermining both national growth and intra-euro zone trade, without changing any country’s “competitiveness”. If it happens in one country in a currency union, the rest suffer. If it happens in all countries, all suffer. The entreaty that other governments should follow the example of the German government in economic policy would be and is the route to a European-wide depression.
Third, the “success” of German growth policy is not the equivalent of exporting unemployment, it is exporting unemployment. The chart below shows unemployment rates, again for Germany, the other euro countries, and the non-euro European countries. In the third quarter of 2008 unemployment in Germany was at the average for the other euro countries, about 7 percent. Five years later the German rate is down, to about 5.5%, and the “other euro” rate up to over twelve percent. As we would expect, the non-euro countries have fared better than those in euro land, with unemployment holding constant at about 8%, little changed over the last three years.
Overall unemployment rates by quarter for Germany, euro zone (EZ) countries excluding Germany and non-euro EU countries, 2008-2013
Whether by intent or happenstance, the German government pursues an economic policy that undermines the ability of its European neighbors to recover. The election victory of Angela Merkel means that this policy will continue for at least four more years. What can those who suffer from this policy do to change it?
The simple answer is, very little. All formal avenues to change appear blocked or unlikely. In the abstract, a reformed, stronger European Parliament could force the German government to pursue a more cooperative route to growth. The likelihood that any German government would allow a reform that would challenge sovereignty over its own policy making is zero.
As an alternative, the governments of the other euro countries could rebel against Bundesbank austerity. While not zero, the probability would be quite low. With each passing month the other governments become increasingly dependent on the alms from Berlin as their economies show no sign of recovery. Having failed to pursue the interests of their citizens during three years of harsh austerity, we have little reason to expect it now.
Perhaps the most likely source for a policy change would be if the German economy joined the others in euroland by falling into recession. The situation is grim, indeed, when the vast majority of Europeans see this as their only hope. It leaves us very far from the late-1940s vision of a cooperative Europe.