Germany fact of the day

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.


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