Germany’s real effective devaluation in terms of relative unit labour costs compared with the EU27 during 1994-2009 is about 20%.
The post, which focuses on German outsourcing to Eastern Europe (an effect not included in the above estimate), is interesting throughout. Germany is sometimes called an "inflexible" country or an "inflexible" culture. But if you look at the longer sweep of history, you can make an equally good or better case that the Germans have a remarkably flexible culture, sometimes too flexible. In this particular case it seems to be just flexible enough.
This account can help us understand why Germany is not so keen on higher inflation and a weaker euro. Think of depreciation as a substitute for wage flexibility. If you've managed a good deal of wage flexibility — in part in advance — policymakers probably don't need or want the depreciation. It bears also on why the Germans don't so much see Keynesian economics as applying to their country.
Addendum: I very much enjoyed this Paul Krugman post.
Somehow I did not expect Tyler Cowen, of all people, to praise Germany, of all countries, for flexible labor markets.
The policy might work during periods of full employment when it is easier to do it.
Are you advocating that we should outsource jobs to Mexico to improve American worker productivity, just as Germany did to Eastern Europe.
Perhaps bad timing.
Just because a country is highly unionized doesn’t meant that its unions will have the political intent or ability to impede pro-competitiveness measures. Institutional and cultural constraints matter – Singapore is highly unionized, as an extreme example.
Maybe Germany is just better at allowing unions to identify with the longer-term interests of the organizations that employ union labor.
>>>Germany’s substantial trade surplus with its southern neighbours is in the spotlight. Many economists argue that Germany’s trade imbalance with its southern Eurozone neighbours has contributed to their woes.<<<
So, it is Germany’s fault that industries export a lot of goods that it’s southern neighbors want? I didn’t get the economic rationale for this criticism of German industry?
“No fiscal rule would have constrained the Spanish housing bubble and its consequences.”
Again I ask, do Keynesians believe that the government can only increase sentiment upward and only at the correct time?
I have all these questions. Demographically, maybe we need to move from young people consuming houses to old people consuming elder care and services. Old people don’t need debt. Does hitting savers with inflation affect everyone equally? All these questions just get dismissed out of hand. Just pull forward activity with debt and everything will work out. Somehow we won’t end up in exactly the same situation that resulted from the last time we did it.
This is what I got from Krugman’s piece:
“German economists and politicians are SO conceited that they won’t unquestioningly accept everything I tell them to do.”
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