Hopner’s neo-classical view of the euro crisis

by Dirk Ehnts, Econoblog101

Martin Hopner is head of a research group at the MPIfG (Max-Planck Institut for society studies). The research group is titled ‘political economy of European integration’. I read a short article by him (here) that is based on a larger paper and was published with the foundation of the German labour unions.

The abstract is available in English (oddly enough, neither website nor papers seem to be available in English – that is sub-MPI standard):

Euro member states possess very different wage bargaining regimes. This heterogeneity has shaped the diverging wage and price increases among European member states and has therefore contributed to the real exchange-rate distortions from which the euro-zone has suffered since the introduction of the common currency. This paper analyses nominal wage increases in twelve euro countries during the first ten euro years, 1999-2008, to demonstrate the above. Neither the European-wide export of German-style wage bargaining nor European-level wage coordination can be expected to solve the problem of heterogeneous wage pressures. It is therefore unlikely that the euro will function any better in the future than it has in the past.

When I read that I instantly though: neo-classical. The typical neo-classical starts with the labor market and develops everything else from there. Hence, it is differences in wage growth that caused the euro zone crisis. I agree. Next question: is this a cause or a symptom? I guess for him it is a cause, but for me it is a symptom. It is common knowledge that the German wages are set through coordination, and many Southern European wages are not. Is this, then, why wages have been growing so quickly in Spain from 1999-2007?

AMECO has some data on wages in construction (Nominal unit wage costs: building and construction; 2005=100):


The story here is that of construction workers in Spain earning rising wages until 2008 when the property bubble burst. Why did wages rise so fast and so high (relatively)? Well, people went crazy over real estate and lots of it was built. This leads to labour shortages and when something is scarce, its price goes up. Construction labour was scarce, so wages in that sector went up. Since you can work in construction without a lot of education, other sectors had to increase their wages to keep their workers from moving to the construction sector. That is where the rising wages in Spain are coming from. And that is why they are falling now. There is less demand for investment (read: housing), and hence wages are not rising. Austerity policies have something to do with why they are falling, but that is another discussion.

Of course, the fall in wages has macroeconomic consequences. Here is a look at some data from AMECO:

Gross wages and salaries: households and NPISH in billions of euros.


It seems that there is a break in Spain in 2008, because wages start falling afterwards. Was there a change in the wage regime? Did Spain take over the German system of coordinated wages? The answer is no. Instead, the real story happened on the capital market. Spanish households had increased their debts through to 2008, buying house financed with mortgages, then after prices started falling began repaying. Here is domestic credit to the private sector (in % of GDP, World Bank data):


Obviously, a lack of demand results since people preferred to repay debt to consumption. This, however, is a Keynesian demand story and incompatible with a neo-classical world view.

I find it quite astonishing that even now the crisis in Spain (and Ireland, which was also about real estate) still has not been understood by many colleagues. Maybe wage regimes have something to do with it, but how can you choose to completely ignore the role of capital markets? Spanish and Irish household debt increased over many years, and that development has not been caused by the labor market. So, a or perhaps the major explanation for the shift in the wage growth is the capital market, not labor market institutions.

However, a neoclassical can’t argue that. Savings are equal to investment, so the capital market is of no concern apart from the quality of the investment, which influence long-term growth. But this is about short-term depression, not long-term growth. If investment stays at low levels, than incomes will remain depressed longer.

If your theory says that whatever happens on the capital market, it should not have any effect on GDP or employment, and then you look at Spain 1999-2013, how can you not say: “wait a second, something is wrong here – the data don’t fit my theory!” There is still refusal on the neo-classical side of economists to engage in discussion with the other side. All the while, the other side looks at wages and goods and capital markets, too, so this refusal to engage in a contest of ideas is asymmetric.

[iframe src=”/files/ad_openx.htm” width=”600″ height=”300″ frameborder=”0″ scrolling=”no”]

[iframe src=”http://econintersect.com/authors/author.htm?author=/home/aleta/public_html/authors/d_ehnts.htm” width=”600″ height=”480″ frameborder=”0″ scrolling=”no”]

One reply on “Hopner’s neo-classical view of the euro crisis”

  1. The principle problem of classical economics is that it is frequently proved to be a comprehensive theory that is in conflict with major economic events and has little predictive abiilty of major turning points. The best that can be said is that it provides a commn framework for discussion, but that of itself is no more than the Harry Poter Trilogy does for readers of the books. 
    What is needed is a comprehensive theory that when back tested against the last 100 years of history is found to be reliable and timely as opposed to dramatically wrong at major turning points.

Comments are closed.