by Dirk Ehnts
Often in articles on the euro zone crisis I read things like this (written by Michael Pettis):
In the end this is Germany’s crisis to resolve, not China’s. Germany has benefited tremendously from the euro. Nearly all of its growth in the past decade can be explained by its rising trade surplus which, given monetary policy driven almost exclusively by the needs of slow-growing and consumption-repressed Germany, came at the expense of the rest of Europe.
I think this is basically right, but on the other hand misleading. Let me point out two things.
First, I want to bring up German GDP growth in the past decade.
This does not look like Germany has benefited a lot from the euro. Average growth is 0.8% – wow! Of eurozone members, only Italy did worse in the naughties. Growth in the 1990s had been averaging significantly over 1%, so even for Germany this is weak growth. A look at real wages taken from an article of the SPIEGEL reveals the changes in real wages for the past decade.
Although this is in prices of 2005, you can see that changes have varied. The richest ten percent saw their incomes rise by 2.1%, while the poorest ten percent saw their income fall by 19.1%. The table reveals further that except for the richest 10% of Germans, the years 2000-2009 was a period of stagnant or – more likely – sinking real wages. That also explains Germany’s weak domestic demand.
Therefore, I agree with Michael Pettis that Germany has to adjust. However, it is not as easy as some may think. Germany did not have high growth rates after the euro was introduced in 1999, in fact 80% of the population saw real wages falling. Now the population would be shocked to find out that these were actually the good times, and now that we are in bad times the burden would fall on them.
This reminds me of Ben Bernanke talking about how the US has benefited from trade with China (speech from December 2006):
China’s development and its opening up to the global economy have also benefited the United States in many ways.
That ‘depends on who your friends are.’ Trade integration generates winners and losers, as we know from neo-classical trade theory. The Heckscher-Ohlin model tells us that labor-scarce and capital-abundant Germany should expect lower wages and higher interest rates from more economic integration.
The way things are turning, out lower wages have materialized, but higher interest rates came hand in hand with higher default risk. The euro zone has been a failure so far, and if it is not reformed fundamentally it is doomed.
Germany Must Do It, Not China by Michael Pettis