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Andrew Watt for Social Europe Journal: Proper analysis suggests Germany is not a wage-productivity paragon but a major cause of the eurozone crisis
Over the course of the last week's tense negotiations over a Cyprus bailout deal, much of the commentary has focused on the role of Europe's finance ministers. But perhaps closer attention should be paid to Mario Draghi, the president of the European Central Bank. On 14 March Draghi made a presentation to heads of state and government on the economic situation in the euro area. His intent was to show the real reasons for the crisis and the counter-measures needed. In this he succeeded – although not in the way he intended.
Draghi presented two graphs that encapsulate his central argument: productivity growth in the surplus countries (Austria, Belgium, Germany, Luxembourg, Netherlands) was higher than in the deficit countries (France, Greece, Ireland, Italy, Portugal, Spain). But wage growth was much faster in the latter group. Structural reforms and wage moderation lead to success; structural rigidities and greedy trade unions lead to failure. QED.
According to the Frankfurter Allgemeine Zeitung, which reported the affair approvingly, the impact of Draghi's intervention was devastating. François Hollande, the French president, who had earlier been calling for an end to austerity and for growth impulses, was, according to the newspaper, completely silenced after the ECB president had so clearly demonstrated, with incontrovertible evidence, what was wrong in Europe – or rather in certain countries in the eurozone – and what must be done.
Things are not as they seem, however. Draghi's presentation contains a simple but fatal error – or should that be misrepresentation? As the note to the graphs indicates, the productivity measure is expressed in real terms. In other words, it shows how much more output an average worker produced in 2012 compared with 2000. So far so good. However, the wage measure that he uses, compensation per employee, is expressed in nominal terms (even if, interestingly, this is not expressly indicated on the slides). In other words, the productivity measure includes inflation, but the wage measure does not.
But this is absurd. Real productivity growth sets the benchmark for real wage growth. In a country where real wages increase in line with productivity, the shares of wages and profits in national income will remain constant. By contrast, when nominal wage growth tracks real productivity growth, which is apparently the role model suggested by the ECB president, the share of wage income in national income will permanently decrease. Moreover, real wages will decline continuously, if price inflation is higher than nominal wage growth.
In a country with inflation at the ECB target (1.9%) one would expect a gap to open up between the red and blue line in the ECB president's charts of 1.9% per year. Cumulated over the 12 years since the start of monetary union, for such a "benchmark country" the nominal wage-real productivity gap would represent almost 28%.
If Hollande had been aware of this, he need not have been silent at all. On the contrary, he could have pointed out that his country almost perfectly fits this benchmark: on Draghi's chart, the gap for France is about 32%. Similarly, the figure of 28% would need to be subtracted from the supposed competitiveness gaps of the other deficit countries, substantially reducing – although not eliminating – them.
Moreover – and this is the key point – using the correct figures transforms Germany from the wage-productivity paragon, as portrayed by the central bank, into what it really is: a country that has systematically undershot the stability norm for balanced growth in a monetary union, and thus been a major contributing factor to the crisis.
A case can be made that the presentation by the ECB president does indeed reveal the true nature of the crisis, albeit unintentionally. Senior economic policymakers in the European Union are either unaware of basic economic concepts or they are intentionally using misleading figures – to put it mildly – to force policymakers on to a course that suits their ideological preferences but which is inimical to the stability and recovery of the eurozone and, in this particular case, indeed, to their constitutional mandate. © Guardian News and Media 2013

jomichael (44)

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It’s obvious and everybody knows that the European economic crisis is a deal of a group of intelligent people. They use it to make profits with speculation. The EU, the ECB, the IMF have, or are supposed to have, the best economists the on the planet. How can they be so limited and unable to propose good policies in that struggle against the crisis? Nobody can believe that. That makes more than three years that the same decisions are applied and the same failure is observed. Greece, Portugal, Cyprus, Spain, Italy… The same solutions, the same errors and finally the same disaster. Why can´t they change the policy of rude cuts. Obviously they cannot change that because it profit to anyone and concretely to Germany. Angela Merkel is the absolute leader oh that deal. She is a very smart woman. She just forgets one thing: if Europe is blocked, Germany will be blocked too. She can laugh now, presenting her country as a paragon in economic development, lying and exploiting the jobless South European citizens who move to Germany. As the Director of ECB Draghi knows very well what he is talking about and he didn´t discovered that the day before yesterday. I think that all that politicians are afraid of Merkel.
The most ridiculous is Hollande. He is incapable to apply what he says in his speeches since before he stood in general elections in France. He knows that Merkel is lying the people, but he kept silence after the statement of Draghi. People are suffering and every day we hear about those meeting of heads of states, of finance ministers in Brussels… For what do those meetings serve? Nothing, of course. When they attend those meetings it’s just to justify their own wages. They waste our money for nothing and they all know that Germany of Merkel is just a modern country of slavery. At least Merkel is smart for her country. Unfortunately the other countries only have stupid leaders.