Structural imbalances in the Eurozone

A joint article – entitled ‘Austerity could only ever bring Europe so far’ – has been published in the Guardian newspaper (and elsewhere).  It is signed by the Hungarian EU Commissioner for Employment, a French MEP, an Irish government minister (Joan Burton), a former Belgian politician (and current OECD official) and the French president of the European Economic and Social Committee.  A number of proposals are made regarding the future governance of the EU, such as the necessity for a banking union, increased investment (including in education) and an expansionary monetary policy.  But the most striking aspect of the article is its argument that “Rebalancing through aggressive reduction of government spending and similar measures in deficit countries… is, without higher domestic demand in the surplus countries, a recipe for long-lasting recession and disintegration”.  Specifically, they want to see wages in surplus countries “catch up with productivity”.  This, to my knowledge, is the first semi-official recognition of one of the key structural imbalances underpinning the crisis.

That imbalance arose from a growing competitiveness gap between core and periphery Eurozone members from the mid-1990s onwards.  German wages were systematically suppressed throughout this period as labour markets were liberalised and austerity lionised, trends that made Germany very much an outlier in terms of Eurozone trends.  Of course, labour costs constitute only one aspect of competitiveness and many high-wage economies (such as that of Finland, and indeed Germany) are also highly competitive due to high levels of technological investment and other factors. But for the Southern European countries in particular, labour costs are a relatively important aspect of competitiveness due to the high labour intensity of vital industries such as tourism, so the growing disjunction between their labour costs and those of Germany constituted an especially problematic development. It is important to emphasise that the peripherals were not behaving in a manner inappropriate to the maintenance of a currency union – wages there tended to rise in line with inflation and the growth of productivity, whereas it was Germany’s suppression of wages below trend growth in inflation and productivity that created an imbalance.

Jorg Bibow makes the point that this German strategy could work only if other countries behaved differently to Germany and ran up debt in order to purchase German exports, highlighting the madness of German leaders now insisting other countries adopt the German template. (The same point has been made by Martin Wolf).  Wage cuts and public expenditure reductions for the ‘bail-out’ countries reduce domestic demand – the principal motor of growth for economies that will, therefore, not only not recover themselves but that will also offer diminished export opportunities for German firms.  The recent article by Joan Burton et al seems to finally be acknowledging this dysfunctional reality, but whether it will penetrate more critical decision-making circles remains to be seen.

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