Are Germany’s low wages driving Europe’s economic crisis?

Last week economist James Meadway made made an important point about the European  economic crisis. The debt crisis, he argued:

Is the product of long-standing imbalances. For a decade of the euro’s existence, mismatched relative exchange rates drove export surpluses in the north – particularly Germany – relative to the south, which ran trade deficits. These surpluses were recycled, through the European banking system, as southern debt, fuelling further imports. Surpluses and savings on one side were matched by deficits and debts on the other.

Indeed it is fairly uncontroversial that trade deficits are a key factor in the plight of Southern Europe’s economies. James is correct that the Euro has encouraged such imbalances. If greece still had its own exchange rate, it would have weakened over the past decade, encouraging exports and reducing imports, and giving the economy the capacity to pay down some of its debts. Yet there is also another important element driving imbalances.

For over a decade wages in Germany have stagnated, while productivity has continued to  leap ahead . This means a bigger and bigger gap  between what Germany is able to produce and what it is able to consume. As such it is unsurprising that the economy has been spewing out exports. As the economist Guillaume Duval recently argued, the German economic model “could only succeed thanks to high consumption and borrowing in Greece, Spain and Ireland.”

This  also explains why the economies of Southern Europe have found it so difficult to compete – not because of any particular gluttony on the part of their workers, but simply because wages have gone some way to keeping up with output. Meanwhile, even the economies of Southern Europe  can compete, stagnating wages limit the capacity of Germans to purchase their output. Meanwhile, the overvalued euro limits their ability to sell to the rest of the world. Unsurprusingly deindustrialisation has proceeded at an  increasing pace in Europe’s peripheral economies.

Germany, remember, accounts for 28% of the whole Eurozone economy. It is not fanciful to imagine that imbalances in the German economy are capable of driving – or at amplifying – imbalances within the entire region. Indeed Germany’s capacity to buy from Europe is even more limited than its stagnating wages would suggest. Because on top of this Germany, has experienced a sharp increase in inequality. This means wealth has been redistributed from poor, who tend to spend what they have, to the rich, who tend to save.

So Merkel might be doing a dman fine job of ensuring that German banks get their loans repaid -whether greece or by European taxpayers general. Yet by imposing austerity upon Germany she is doing exactly the opposite of resolving the European economic crisis, and giving Greece a way out.

To contact Reuben email reuben@thethirdestate.net