The Untold Even Of The Eurozone Crisis

Everyone knows that the Eurozone suffered a crisis from 2010 to 2012, equally periphery countries could no longer sell their debt. H5N1 superficial analysis puts this downward to profligate governments, but await to a greater extent than closely as well as it becomes clear that the formation of the Euro itself led to an excessive monetary stimulus inward these periphery countries. This is widely understood.

But this is non the whole story. It leaves out i primal chemical constituent that is vital if nosotros are to empathise the province of affairs today. Here is a nautical chart of nominal wage growth (compensation per employee) inward the Eurozone as well as selected countries inside it before the Great Recession.

Percentage alter inward compensation per employee (annual): origin OECD Economic Outlook

Between 2000 as well as 2007 High German reward increased yesteryear less than 10% compared to over 20% inward the Eurozone equally a whole (which of class includes Germany). This difference was non primarily caused yesteryear excessive growth inward the periphery countries: reward inward France, Belgium, the Netherlands, Italy as well as Kingdom of Spain all increased yesteryear betwixt 20% as well as 30%. The outlier was Germany.

Of class growth inward nominal reward of less than 2%, as well as sometimes less than 1%, is non consistent alongside a consumer cost inflation target of merely about 2%. It was for this ground that the ECB lowered brusk term involvement rates from 4.4% inward 2000 to 2.1% inward 2004. They were non worried yesteryear excessive inflation inward the periphery - they had to lower rates to counteract the consequence of depression nominal wage growth inward Germany. [1] 

So the ground why Federal Republic of Federal Republic of Germany seems to lead maintain largely escaped the mo Eurozone recession of 2012/3 is that it pursued (perhaps unintentionally) a beggar my neighbor policy inside the Eurozone. Low nominal wage growth inward Federal Republic of Federal Republic of Germany led to lower production costs as well as prices, which allowed High German goods to laissez passer on the axe goods produced inward other Eurozone countries both inward the Eurozone as well as inward 3rd markets. This mightiness brand feel if Federal Republic of Federal Republic of Germany had entered the Eurozone at an uncompetitive telephone commutation rate, but my ain analysis suggests it did not, as well as Germany’s electrical flow relative cyclical seat as well as its electrical flow concern human relationship surplus confirm this.

As I argued inward an before post, I exercise non intend this departure inward cyclical seat is the original ground why Federal Republic of Federal Republic of Germany resists expansionary measures inward the Eurozone. But it is a lot easier to lead maintain upward these obstructive positions when you lot are benefiting from this beggar my neighbor policy, as well as other countries that lead maintain suffered equally a outcome appear non to empathise what you lot lead maintain done.

[1] One of the comments on my before shipping service tried to justify this beggar my neighbor policy using the next argument. Although the ECB's inflation target was merely about 2%, they suggested that inflation below this was clearly desirable. What the Eurozone provided was an incentive organisation to essay as well as accomplish below target inflation yesteryear becoming to a greater extent than competitive. Federal Republic of Federal Republic of Germany had successfully risen to this challenge, as well as forthwith it was upward to other countries to essay as well as exercise the same. Now if this competitiveness had been achieved yesteryear improvements inward productivity, hence this stance - although notwithstanding false - would hold upward worth discussing. When it is achieved yesteryear cutting nominal reward (such that existent wage increases are below productivity growth), it is non clear what efficiency gains are beingness achieved.

Postscript: Simon Tilford of the Centre for European Reform makes much the same declaration here (HT Zoe Keller).