Saturday, March 9, 2013

Sinnlos, Part II


Just when you thought it might be possible to have a rational discussion about the Eurozone situation that included mainstream German opinion, along comes Hans-Werner Sinn, this time in the company of Akos Valentinyi, to prove that you can’t.  Let’s take a look at their latest, and truly clueless, post on VoxEU.

They begin by announcing, “There is a large body of literature on global imbalances. To date, however, little attention has been paid to the imbalances within the EU or the Eurozone...”  Yes, why stoop to read Paul Krugman, George Soros, Martin Wolf or any of the thousands of less prominent writers on this topic, who have been fixated on these imbalances from the moment peripheral bond spreads exploded?  This keeps our thinking pure.

But let’s not get distracted.  Their real point is that they have discovered something new and significant: there are large trade imbalances within Europe, augmented by capital flight!  Who could have imagined?  And the solution is for the deficit countries to devalue, which they can do either externally (leave the euro) or internally (deflation).  Both are difficult-to-impossible.  Such a pity.

Perhaps if these worthies (and Sinn is by far the most influential economic voice in Germany) had deigned to read Krugman, Soros, Wolf or one of the others, they might have learned that one country’s deficit is another’s surplus, and that adjustment is necessarily relative.  This is a matter of macroeconomic identities, but it appears that Sinn wouldn’t recognize an identity if it were staring at him from a mirror.  The point: for the purpose of rebalancing, it doesn’t matter whether peripheral prices go down or German prices go up.  If the first is virtually impossibly, then, just maybe, it might make sense to take a look at the second.

In fact, German wage repression, as many have noted, was an important part of the story over the course of the 00's.  Because of the Hartz reforms, and cautious wage bargaining in general, German wages remained essentially flat for nearly a decade.  This is great for generating a massive trade surplus, but, and here’s that pesky identity, Germany’s surplus within Europe was also the peripheral deficit.  Germans could save like crazy from the earnings inflow, which is simultaneously the outflow that forced their trading partners to borrow.

So, if you know a bit about economics and are able to follow an argument like this, you can imagine a third possibility, unmentioned by Sinn and Valentinyi: German could reflate.  They could run a looser fiscal policy and pump up domestic demand, drawing in imports from the deficit lands.  They could give themselves a big pay raise, and allow their price advantage over the peripherals to erode.

By the way, none of this is about “reducing performance”.  In Germany one hears the argument, if others are losing the race, that’s not a reason for you to slow down.  By all means, Germany should continue to improve its institutions for investment, innovation and building worker skills.  No reasonable person wants their productivity to go down.  But the point of all this improvement should be the possibility of living better, not amassing an unsustainable surplus that requires their customers to borrow their way to destitution.

2 comments:

Dave L said...

"...you can imagine a third possibility, unmentioned by Sinn and Valentinyi: Germany could reflate."

Actually, they do mention this, in about the middle of the piece after the subhead: "Rebalancing in the Eurozone"

"Internal devaluation through rising prices in the core does not lead to recession in the periphery. The core, however, is required to bear the cost of higher inflation, which may also undermine the stability of the monetary union."

And that's it. I assume that 'may also undermine the stability of the Eurozone' is code for 'this is something Germans would not tolerate', so it looks like the peripherals are just going to have to suck it up and endure a decade-long depression. It may be wrong to associate 'surplus' with 'virtue', but you wouldn't go astray associating it with 'power'.

KISSWeb said...

"In fact, German wage repression, as many have noted, was an important part of the story over the course of the 00's. Because of the Hartz reforms, and cautious wage bargaining in general, German wages remained essentially flat for nearly a decade."

I don't understand this statement. According to the BLS international labor comparisons, direct pay and benefits for German manufacturing workers in U.S. dollars increased 89% while Euro area inflation was roughly 25%. That's a real increase of about 50%. While it's true German pay did not go up quite as fast as it did for its neighbors (who saw increases between 100-110%), wage and directly-paid benefit growth in Germany was far higher than in the UK and the US, two of German