That puzzling “revelation” politely called “German wage moderation”

A few days ago Peter Bofinger, one of Germany’s ‘wise men’, published an astonishing post titled ‘German wage moderation and the Eurozone crisis’ that appeared on VoxEU.org (see here ) and Social Europe (see here). The post was astonishing in more than one way. First of all, it seems astonishing that, in late 2015, and not 10 years earlier or so, a wise man from Germany should feel the need to draw attention to the role of German wage moderation in the eurozone crisis. Persistent German wage moderation under the euro is an undeniable fact. How can there be any controversy about it some 20 years after it started?

No less astonishing was the particular occasion that triggered Bofinger’s post. Bofinger responds to a recently published CEPR Policy Insight titled ‘Rebooting the Eurozone: Step I – agreeing a crisis narrative’. This is an essay by a group of CEPR-related economists attempting to establish what they see as a ‘crisis narrative’ that may be more in accordance with the basic facts about the eurozone crisis (rather than being based on myth or political convenience). In particular, these economists reject the official narrative that is still popular today among some key eurozone authorities, especially Germany’s finance ministry: namely, the ‘sovereign debt crisis’ myth. Their alternative crisis narrative highlights large intra-eurozone capital flows and imbalances and the ‘sudden stop’ event that featured their eventual implosion. Bofinger generally agrees with the proposed alternative crisis narrative but makes the point that something rather important is missing in it: the alternative CEPR crisis narrative pays zero attention to the role of German wage moderation and is therefore ‘incomplete’. It is indeed astonishing that one of the supposedly leading European economic policy think tanks proposes a crisis narrative, and one supposedly based on the basic facts, but misses the most basic fact of all: that German wages stopped rising under the euro.