German wage squeeze – A threat for Europe

Regarding our english speaking readers we would like to point to an article by Ambrose Evans-Pritchard in The Telegraph, May 5 2015 titled „Germany’s record trade surplus is a bigger threat to euro than Greece„.

The highlights:

„If EU law were properly enforced, Germany would face fines for endangering eurozone stability and breaching the Macroeconomic Imbalance Procedure for the fifth year in a row.“

„The International Monetary Fund warned last year that the German surplus – then 8.25pc of GDP when adjusted for the cycle – is destructive for EMU as a whole. It is between three and six percentage points higher than is either “desirable” or justified by fundamentals. It is not in Germany’s own economic interest, and makes it even harder for the EMU crisis-states to claw their way out of trouble.

The IMF said Germany’s exchange rate is undervalued by as much as 18pc under trade elasticity theory even then, before the more recent plunge in the euro. This was achieved by squeezing wages in the early years of EMU, undercutting the South.

Efforts by France, Spain, Italy, Portugal and Greece (super-competitive Ireland is irrelevant to this debate) to claw back lost ground by doing the same at this late stage is precisely what pushed the EMU system as a whole into a quasi-deflationary slump from 2011 to 2014.“ [...]

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