In what I described over a year ago as the untold story of the Eurozone crisis, Germany held nominal wage increases below the level of other core Eurozone countries, gradually gaining a large competitive advantage over them. This had a number of consequences, but perhaps the most important is that when the Great Recession hit, Germany was much better placed than all the other Eurozone countries. (It is essentially a zero sum game, because the Euro exchange rate moves to influence overall Eurozone competitiveness, which is why I describe it as Germany undercutting its Eurozone neighbours.)
Up until now I have always been careful to avoid describing this as a deliberate beggar my neighbour policy. But one of the five members of Germany’s Council of Economic Experts, Peter Bofinger, writes:
In 1999, when the Eurozone started, Germany was confronted with an unemployment rate that was too high by German standards, although it was still below the EZ average. The solution to the unemployment problem was typical of Germany’s corporatist system. Already in 1995 Klaus Zwickel, boss of the powerful labour union IG Metall, made the proposal of a Bündnis für Arbeit(pact for work). He explicitly declared his willingness to accept a stagnation of real wages, i.e. nominal wage increases that compensate for inflation only, if the employers were willing to create new jobs (Wolf 2000). This led to the Bündnis für Arbeit, Ausbildung und Wettbewerbsfähigkeit (pact for work, education and competitiveness), which was established by Gerhard Schröder in 1998. On 20 January 2000, trade unions and employers associations explicitly declared that productivity increases should not be used for increases in real wages but for agreements that increase employment. In essence, ‘wage moderation’ is an explicit attempt to devalue the real exchange rate internally.
You still hear people say that the DM was overvalued when it converted to the Euro, but my research at the time suggested otherwise, and it is difficult to argue against the view that with today’s current balance surplus of over 7% of GDP Germany is grossly undervalued.
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.
This post was first published on Mainly Macro