Fourteen years ago, The Economist wrote of Germany: “As economic growth stalls yet again, the country is being branded the sick man (or even the Japan) of Europe.”
This, it was argued, was “inevitably casting a cloud over Europe’s single currency…for Germany accounts for a full third of the euro countries’ output.” It went on to list the reasons for Germany’s malaise, including “a byzantine and inefficient tax system, a bloated welfare system and excessive labour costs”.
I am just back from Frankfurt, where I spoke at a symposium in honour of Professor Hans Tietmeyer. President of the Bundesbank in the 1990s, at the time Mr Tietmeyer had warned that monetary union requires a strong capacity for structural adjustment. The experience with German monetary union after unification was still fresh.
At the start of the euro in 1999, Germany was undergoing a dual adjustment process to unification, with unemployment rates in eastern Germany still around 20%, and to the opening of markets of its central and eastern European neighbours. Facing low potential growth, the German corporate sector deleveraged and tried to raise profitability with direct investment in other European countries. This led to the integration of the eastern European economies into the German production chain. At the same time, wage moderation was driven by reforms, opening up the labour market to the unemployed. Social partners also took responsibility in full autonomy, and included opening clauses in wage agreements.
This process coincided with the introduction of the euro. The eurozone periphery was experiencing falling sovereign risk premia at a time when financial markets were integrating in the EU. The increase in the capital flowing from the core of the eurozone to its periphery came as debt, not Foreign Direct Investment, and it went disproportionately into non-tradable sectors, contributing to overheating. Since the boom came to an end in 2007, peripheral countries’ current account deficits have narrowed substantially.
It has been argued that the necessary economic rebalancing could be engineered in a symmetrical way between current account surplus and deficit countries. However, the reality is more complex.
The main reason for this is that the eurozone is not a large closed economy, but a large open economy.
On the one hand, reflecting above developments, Germany’s current account surplus has almost halved vis-à-vis the euro area between 2007 and 2012. On the other hand, over the same period, Germany’s surplus vis-à-vis the rest of the world has almost tripled.
The structural shifts over the last 20 years imply that peripheral eurozone countries are less integrated into Germany’s trade structures than is commonly thought. A Commission study published in December 2012 found that more dynamic domestic demand in Germany would have only a very limited direct impact on the current account of countries such as Spain, Portugal or Greece.
In the eurozone, as a large open economy, businesses, small and large, are bound to face the challenges that come with global competition and should seek out the opportunities from it. Competitiveness is fundamentally based on the real factors of production and productivity, especially on our innovative capacity and well-trained labour force.
Overcoming the current crisis thus depends to a large degree on the capacity to turn around structural economic imbalances, in all countries in Europe. This is why structural reforms are so important: to improve the functioning in our goods, services, labour and capital markets.
Our recommendations to Germany of 29 May include sustaining the conditions that enable wage growth to support domestic demand. This requires making better use of its labour resources, for example by better integrating the low-skilled and by raising the educational achievement of disadvantaged people, by removing work disincentives for second-earners and better availability of childcare and all-day schools. Germany should also continue efforts in network industries, and stimulate competition in the services sectors to boost domestic sources of growth.
At the same time, the German labour market is resilient and the favourable employment situation has prompted social partners to agree on wage increases of almost 3% per year recently. After the moderation of the adjustment years, this is a noteworthy development. Wages are growing above productivity, and unit labour costs have been on a rising trend for the last few years.
But we are well-advised to recall that as a word competitiveness is derived from competition, not from suggesting to companies in any one country that they should become less competitive on global markets.competitiveness is fundamentally based on real factors, deleveraged and tried to raise profitability, domestic demand in Germany, European economies into German production chain, Germany's current account surplus has almost halved, our recommandations to Germany, social partners also took responsibility