German Wage Repression: Getting to the Roots of the Eurozone Crisis

By John Miller, professor of economics at Wheaton College. Originally published in the September/October Annual Labor Issue of Dollars & Sense

Germany has been insistent that the so-called peripheral countries increase their competitiveness through slower wages rises or even wage cuts. Wage increases in Germany are an equally important, and symmetrical, part of this necessary adjustment process.

The wage increases are steps in the right direction, but relatively small steps. More gains for German workers in the future would be both warranted and a win-win proposition for Germany and its trade partners.

— Ben Bernanke, “German wage hikes: A small step in the right direction,” Brookings Institution, April 13, 2015.

Ben Bernanke not only supports recent German wage increases, he also thinks further wage increases for German workers are “warranted and a win-win proposition for Germany and its trade partners”?

Now that’s a jaw-dropper. Has the former head of the Federal Reserve Board—the guardian of “price stability,” which makes policy designed to keep U.S. wages in check—switched sides in the class war, now that he is retired?

Hardly. Rather, it’s that catering to the demands of German high finance and other elites has been so disastrous that even the former chair of the Fed cannot deny the undeniable: unless Germany changes course and boosts workers’ wages, the euro crisis will only worsen.

Let’s look more closely at just how German wage repression and currency manipulation pushed the eurozone into crisis, ignited a conflict between northern and southern eurozone countries (with Germany as the enforcer of austerity), and left Greece teetering on the edge of collapse.

From “Sick Man” to Export Bully

In 2000, Germany was widely considered “the sick man of Europe.” Through much of the previous decade, the German economy had grown more slowly than the European Union average, its manufacturing base had shrunk, and its unemployment rate had risen to near double-digit levels. Nor was Germany an export powerhouse, with its current account (the mostly widely used and most comprehensive measure of a nation’s financial balance with the rest of the world) showing a modest deficit in 2000.

Adopting the euro as its sole currency, in January 2002, was no panacea. For the next two years, Germany’s economy continued to stagnate. But converting to the euro—whose value was more or less an average of that of the stronger and weaker former currencies of the member countries—soon did improve Germany’s competitive position internationally. German exports, no longer valued in strong deutschmarks, but in weaker euros, became cheaper to buyers in other countries. At the same time, the exports of countries that used to have weaker currencies, such as the Greek drachma and the Spanish peseta, became more expensive. That alone transformed Germany’s current account deficit into a surplus.

China is widely accused of “currency manipulation,” keeping the renminbi weak to boost its exports. But few see that the eurozone—the now 19- country bloc sharing the euro as its common currency—has functioned for Germany as a built-in currency manipulation system. And much like China, Germany used a lethal combination of wage repression and an undervalued currency to boost its exports and output at the expense of its trading partners.

Following the adoption of the euro, Germany instituted a set of “labormarket flexibility” policies intended to further improve its international competitiveness. Known as the “Agenda 2010 Reforms,” the new policies reduced pensions, cut medical benefits, and slashed the duration of unemployment benefits from nearly three years to just one. They made it easier to fire workers, while encouraging the creation of parttime and short-term jobs. The Organisation for Economic Co-operation and Development (OECD) reports that, from the mid-1990s to 2008, the incomes of the poorest 30% of Germans actually declined in real (inflation-adjusted) terms. Germany’s repressive labor policies kept a lid on wage growth. In every year from 2000 through the onset of the financial crisis in 2009, German compensation per employee increased more slowly than the eurozone average, and less even than in the United States.

During the 1990s, German workers’ real (inflation-adjusted) wages rose along with productivity gains, meaning that employers could pay the higher wages without facing higher labor costs per unit of output. After 1999, wage gains no longer kept pace with productivity, and the gap between the two widened. As wages stagnated, inequality worsened, and poverty rates rose. Total labor compensation (wages and benefits) fell from 61% of GDP in 2001 to just 55% of GDP in 2007, its lowest level in five decades.

German wage repression went even further than necessary to meet the 2% inflation target mandated by the eurozone agreement, and insisted upon by German policymakers. Unit labor cost (workers’ compensation per unit of output) is perhaps the most important determinant of prices and competitiveness. Unit labor cost rises with wage increases but falls with gains in productivity. From 1999 to 2013, German unit labor cost increased by just 0.4% a year. The reason was not German productivity growth, which was no greater than the eurozone average over the period; rather, it was that German labor-market policies kept wage growth in check.

This combination of a built-in system of currency manipulation afforded by the euro and labor-market policies holding labor costs in check turned Germany into the world’s preeminent trade-surplus country. As its competitive advantage grew, its exports soared. Germany’s current account surplus became the largest in the world relative to the size of its economy, reaching 7.6% of the country’s GDP, more than twice the size of China’s surplus compared to its GDP.

Beggar Thy Neighborhood

Germany’s transformation into an export powerhouse came at the expense of the southern eurozone economies. Despite posting productivity gains that were equal or almost equal to Germany’s, Greece, Portugal, Spain, and Italy saw their labor costs per unit of output—and in turn prices rise— considerably faster than Germany’s. Wage growth in these countries exceeded productivity growth, and the resulting higher unit labor costs pushed prices up by more than the eurozone’s low 2% annual inflation target (though by only a small margin).

The widening gap in unit labor costs gave Germany a tremendous competitive advantage and left the southern eurozone economies at a tremendous disadvantage. Germany amassed its ever-larger current account surplus, while the southern eurozone economies were saddled with worsening deficits. Later in the decade, the Greek, Portuguese, and Spanish current account deficits approached or even reached alarming double-digit levels, relative to the sizes of their economies.

In this way, German wage repression is an essential component of the euro crisis. Heiner Flassbeck, the German economist and longtime critic of wage repression, and Costas Lapavistas, the Greek economist best known for his work on financialization, put it best in their recent book Against the Troika: Crisis and Austerity in the Eurozone: “Germany has operated a policy of ‘beggar-thy-neighbor’ but only after ‘beggaring its own people’ by essentially freezing wages. This is the secret of German success during the last fifteen years.”

While Germany’s huge exports across Europe and elsewhere created German jobs and lowered the country’s unemployment rate, the German economy never grew robustly. Wage repression subsidized exports, but it sapped domestic spending. And, held back by this chronic lack of domestic demand, Germany’s economic growth was far from impressive, before or after the Great Recession. From 2002 to 2008, the German economy grew more slowly than the eurozone average, and over the last five years has failed to match even the sluggish growth rates posted by the U.S. economic recovery. With low wage growth, consumption stagnated. German corporations hoarded their profits and private investment relative to GDP fell almost continuously from 2000 on. The same was true for German public investment, held back by the eurozone budgetary constraints.

At the same time, Germany spread instability. Germany’s reliance on foreign demand for its exports drained spending from elsewhere in the eurozone and slowed growth in those countries. That, in turn, made it less likely that German banks and elites would recover their loans and investments in southern Europe.

Wage Repression and the Crisis

No wonder Bernanke now describes higher German wages as an important step toward reducing Europe’s trade imbalances. More spending by German workers on domestic goods and imports would help Germany and its trading partners grow, and improve the lot of working people throughout the eurozone.

Of course, much more needs to be done. Putting an end to the austerity measures imposed on Greece and the other struggling eurozone economies would boost their demand as well. In fact, it would also better serve the interests of Germany and the profit-making class, by helping to stabilize a system from which they have benefited so greatly at the expense of much of the region’s population.

Still, raising the wages of German workers to match productivity gains is, as Bernanke recognizes, surely a step in the right direction. Raising U.S. wages to match productivity gains would help defuse U.S. wage repression and boost economic growth here as well. If Bernanke throws his weight behind that proposition, we’ll truly wonder which side is he on. >See original post for sources. Comments enabled at the request of the author

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46 comments

  1. James Levy

    How come German workers, who undoubtedly outnumber German capitalists, and ostensibly have their own political party, went along with this so meekly? These policies were not secret. In France, I would imagine they would have brought millions out into the streets. Since the quid pro quo was not the old Japanese “jobs for life” tradeoff, I would love to know why Germans went along with such a policy.

    1. jan

      Well I suppose you mean the SPD being their “own political party”?
      As usual it is this party and the local versions of it in the netherlands and belgium, that have embraced the neoliberal agenda. In Germany the SPD cut the welfare state, as far as that existed under the leadership of Schröder.

    2. Sam Kanu

      How come German workers, who undoubtedly outnumber German capitalists, and ostensibly have their own political party, went along with this so meekly

      Sorry, remind us again of the last time that US workers actually defeneded their own interests, as opposed to getting suckered by distractions thrown around by American capitalists?

      This isn’t exactly a German problem – its a problem around the western world. For a long time now.

    3. susan the other

      Two things come to mind: one is that Germany was busy paying off war reparations to Russia on the return of East Germany – an issue all Germans agreed upon; and two a prescient awareness of the global economy (my source is laughable but here it is – the German crime series for TV, Tatort, made c. 2006 talked about “going into a depression”). Otherwise, it is a basic mindset in Germany to go along and get along. No doubt they were brainwashed to worship exports.

    4. washunate

      Yeah, great question. First, there’s an important perspective missing here: what actual Germans think. They might tell you there are things they value about how society works more highly than money (difficult for a professional economist to internalize).

      Secondly, it’s because what Germans ‘went along with’ isn’t exactly what the professor describes. For example, when comparing wage growth in Germany and the US, the professor seems to be focused on aggregate and average numbers rather than medians and distributional concerns.

      Third, it’s because Germany is still ultimately a vassal of the Anglo-Americans. There is only so much they can do in outright opposition to the national security state and financial fraud in the present arrangement of international relations. That they have done so much within the system – a German neoliberal is basically a U.S. tree hugger pinko commie socialist – is the main story.

  2. Disturbed Voter

    Captive unions … at least that is how it worked in the US. The unions were controlled opposition in the dialectic between management and labor in the Cold War. Otherwise the unions risked being labeled “red”. After the fall of the Soviet Union, it was no longer necessary to have captive unions, but the status quo continued anyway. Now the hysteria about “reds” has returned. Gotta keep those sheep in the pen.

  3. nmb

    Poor Mr. Schäuble, who recently surpassed Mrs. Merkel in popularity in Germany, is under extreme pressure, mostly by the German capital, to “restructure” the eurozone through the Greek experiment. The German oligarchy is now in a cruel competition mostly with the US companies to hyper-automate production. It sends continuous signals that human labor will be unnecessary for its big companies and presses the German leadership to finish the experiment in Greece.

    Poor Mr. Schäuble must give “earth and water” to the German oligarchs. He must organize a new Treuhand for the whole Europe to sell-off public property, he must completely dissolve labor rights, bring down pensions and wages, destroy the social state. He must end quickly with Greece and pass all the “Greek achievements” to the whole eurozone.

    Europeans should also start to get used to unemployment rates of more than 30%, according to the Greek experiment. When these measures reach Germany, Mr. Schäuble will have the perfect excuse for the angry Germans: blame the Greeks and the European south because they refused to take “reforms” early, it’s their fault.

  4. PlutoniumKun

    This does raise the question of what on earth the supposedly strong German Trade Unions have been doing all this time. I suspect they have been so strongly co-opted into the system that they see national advancement as more important than actually looking after their members interest.

    1. diptherio

      Yeah, I used to think the German model of labor organizing was pretty cool, with worker reps on corporate boards and whatnot. However, it’s become pretty obvious that whatever Germany’s doing vis-à-vis labor organizing is not working out too well (at least not for the laborers).

      1. RepubAnon

        Perhaps the German union leadership has undergone a process similar to “regulatory capture”? I also expect the German workers are motivated by the same ideas which made US labor unions strong supporters of Ronald Reagan: the idea that social programs exist for lazy moochers to live it up on the dole, paid for by the taxes paid by the workers.

        Take one of Reagan’s speeches about “welfare Cadillacs”, translate it to German, and plug in epithets about lazy Greek moochers – I’ll bet that would come very close to what German workers are being told by their leaders.

  5. Tom

    I pity the poor economist. He peddles the same nonsense that the right peddles in Germany: that wage restraint is the reason for Germany´s export success. Unfortunately he doesn´t know history. His first paragraph is pathetic: “In 2000, Germany was widely considered “the sick man of Europe.” Through much of the previous decade, the German economy had grown more slowly than the European Union average, its manufacturing base had shrunk, and its unemployment rate had risen to near double-digit levels. Nor was Germany an export powerhouse, with its current account (the mostly widely used and most comprehensive measure of a nation’s financial balance with the rest of the world) showing a modest deficit in 2000.”
    The good man literally doesn´t have a clue. He so loves his theories that he is not above a selective rendering of economic history. Here the real story: in the Eighties West-Germany had such huge surpluses that it was forced into the so called Plaza accord. Together with the Japanese. The mark shot up but it didn´t do much good. The export surplus (especially with the US) persisted. Then there was unification with East Germany. (That is the part the professor forgets to tell his readers) Manufacturing did shrink indeed. BUT ONLY IN EAST GERMANY. East German deindustrialisation was drastic enough to offset slight growth in West German manufacturing. So what happeded around 2000 was that this process of East Geman deindustrialisation finally came to an end. Ever since industry has been growing more (albeit from a very small base) in East Germany than in West Germany. Finally I hate to put it to the professor but he evidently doesn´t know much about modern industrial production. It has become so capital intensive that wage levels only matter in certain highly labour intensive industries like textiles. None of these industries can be found in Western Europe. On the contrary: firms in capital intensive industries will pay almost any wages for highly trained workers who first build and install those machines and then know how to run them. That is why for instance ABB continues to expand their facilities in Germany for low voltage circuit breakers instead of investing in Shanghai. A new production line easily tops a billion in investment. But could also double productivity. The wage sum of a 1000 people being paid German union wages is maybe a tenth of that sum. That is not totally irrelevant but think of the damage if the implementation is delayed by only one year because you invested in Shanghai.
    The only reason ABB ever invested in Shanghai is for market access. China very cleverly leveraged its size and therefore managed to industrialize. But it doesn´t mean they will be able to ultimately compete. For that they need a tool machine sector which doesn´t exist yet. Germany and Japan lead this field and are the therefore the countries with highest industrial utput per capita. Sorry, but it is known since the industrialial revolution that a 100 indian weavers can´t compete agaiinst a single machine. Nothing has changed.
    That the US deindustrialized has many reasons. High wages is only a part and not even the most important part of the story. Now it is anyhow to late. Illusions like the professors above won´t help. No, I repeat: the good man might really believe that Germany´s “success” is because of wage restraint and thereby crowding out her feckless neighbours. Unfortunately you can lower wages as much as you want. If the person you want to employ doesn´t know how to programm a Trumpf laser robot (Google the company) and furthermore doesn´t have an understanding of the whole complex assembly line (decades of institutional knowledge is prerequisite) then just forget it.

    1. Alex Hanin

      I rather agree with this analysis. It’s like saying ‘Germans sell so many BMWs because they are cheaper than Peugeot’.

      A good book about this is’ Made in Germany ‘, unfortunately only available in French (despite the title).

    2. Sluggeaux

      Thank you, Tom, for answering the little voice screaming in my head: “How can this fool ignore the effect of REUNIFICATION with the former DDR on the German economy, and especially on the labor pool?”

      Economists have an alarming tendency to so love their theories that they simply ignore the social and historical context of economic activity. Germany is led by a Russian-speaking chemist from an until-recently walled hermit-state, whose only understanding of capitalism is theoretical. No wonder the Germans have gotten the Euro so wrong. The southern periphery of Europe is not made up of kindergarteners, and “high-productivity” German workers are so simply by dint of pushing buttons in their capital-intensive manufacturing sites.

      Poor little economist. Terrific Comment by Tom.

      1. susan the other

        Yes, Tom’s comment was good. But it makes me wonder about the big question. What do capitalists do to resolve the automation of capitalism? 30 million unemployed Europeans will destroy Europe as surely as our unemployment will destroy us. Bernanke is really understating the disaster.

        1. washunate

          Paid vacations are a good start to the problem of too much productivity. Keynes thought we would only need to work a few hours a week thanks to the work of compounding growth.

          1. dana

            Your concise comment goes right to the root of the problem, which amounts to the issue of redistribution of value added wealth.

    3. FluffytheObeseCat

      Tom, You made an excellent argument against the writer’s ahistorical approach, but little argument at all against his central thesis: that 21st century German wage suppression is responsible for much of the current socio-economic distress in Europe.

      Wage suppression is not restricted to their powerful, but never all-encompassing manufacturing sector. How do you see his argument, that elites in German (& Belgium & the Netherlands) have gained greatly by short-changing their high-skilled middle classes? (Not all of whom program machinery).

      Would you have more regard for his underlying wage argument if he’d gone on about the way Northern European elites grew envious of the power that oligarchic elites gained in North America and Russia during this time, and endeavored to emulate them?

    4. sd

      For those of us who are not economists, if you could stick to concrete points, it would be greatly appreciated. As written, the only thing I really got out of your long comment was that you don’t like the author.

    5. drugstoreblonde

      The Widervereinigung is still an ongoing process. It is difficult enough to manage the wage distortions created by the wealthiest cities in the Palitinate, Bayern, and Lower Saxony against their smaller counterparts without accounting for the states and cities in the former-DDR.

      Raising wages in Germany might appease very specific industries in Italy, but that is shortsighted, bordering on suicidal. If Americans would have been better served in ignoring Bernanke, why wouldn’t Germans be, too?

    6. MacDur

      Tom,

      You are forgetting the fact that the West German – East German reunification was also a monetary union where the DEM and DDR Mark were exchanged 1:1 with each other. You had companies in the DDR which were, by Western standards, more than competitive but the currency union and the mis-management of the transfer of assets caused serious issues with the reunification.

      Furthermore, you’re not lending enough importance to the authors point that local demand is no where to be found in Germany itself. I live and work in Germany and I can tell you, if you have a life long contract (which is typical for a majority of the German work force) there is little motivation from either employees or employers to increase wages. That impacts overall demand, as German consumers pinch pennies and stores nickel and dime everything possible. Germany is only competitive because of foreign demand for goods, which are mispriced.

      If Germany were still on the DEM then they would be zero competitive right now.

      1. washunate

        I’m a little confused here; your premise appears quite flawed.

        1) Are you aware that at the time of the unification – when the DDR ceased to exist and the individual states became part of the Federal Republic in 1990 – West Germany was already in a monetary union? The Exchange Rate Mechanism (ERM) and the European Currency Unit (ECU – the precursor to the euro) were set up in the 1970s. If the 1/2/3:1 exchange rate system set up from eastern to western marks was the ‘wrong’ ratio, that wouldn’t have helped the West Germans any. The Deutsche Mark was the key peg to which the ERM countries were connected via the ECU. Any adjustment would have had to happen internally, not through export-beneficial currency devaluation.

        2) The data simply doesn’t jive with what you describe. Germany didn’t run notable current account surpluses in the 1990s. There was lots of internal demand – so much so that Germany ran trade deficits(!). The massive current account surpluses everybody thinks about today are a more recent development.

        3) More generally, your notion that being frugal is bad I find borderline comical. You live and work in Germany so you know they have invested massively in everything from healthcare to highways to high speed rail to urban mass transit to wind turbines to solar panels.

  6. nothing but the truth

    american economists always want other countries to reform. never their own. anyone who trusts benrnanke with anything is big fool. he had a plan before he got the job, and he got the job by marketing the plan in his helicopter speech, ie, unlimited bailouts for the asset owners. this guys now is friend of labor? anything is forgiven and forgotten in america if you’re rich, or their doorkeeper.

    “Still, raising the wages of German workers to match productivity gains is, as Bernanke recognizes, surely a step in the right direction. Raising U.S. wages to match productivity gains would help defuse U.S. wage repression and boost economic growth here as well. If Bernanke throws his weight behind that proposition, we’ll truly wonder which side is he on.”

    well said, maybe a bit late.

  7. Walter

    The German success story was thanks to China because of its infrastructure spending requiring a lot of heavy machinery. Hence why China’s imported more from Germany than it exported.
    The other side of German success is to revive their luxury brands by exporting it to Southern Europe because the Euro helped lower borrowing costs and increase access to credit.

    I think it’s fair to say that Germany needed to cut government spending and benefits because they were facing a demographic problem. Out of control increases in wages would make the German feel too comfortable, therefore lacking competitiveness.
    But cutting wages by the right ‘dosage’ would boost the labor force productivity and competitiveness.
    Southern Europe cut their public spending through ‘chaotic’ austerity measures, but they need private investment coming from Germany.
    For the Eurozone to work you need to find the ‘right balance.’

  8. Niels H. Buenemann

    It may be surprising to professor Miller and others, but actually the German Bundesbank advocated higher German wage increases already one year before the cited paper by Ben Bernanke, namely in July 2007, and was seconded by the European Central Bank shortly thereafter. Meanwhile – i.e. during 2014 and 2015 – the real, inflation-adjusted wage index for Germany has risen at a pace of about 2 per cent annually (see: http://bit.ly/1UZVAEO). This can hardly be described as wage repression!

    1. Jack the lad

      If true, that’s an interesting comment about the Bundesbank and ECB supporting high wage increases in Germany, Niels, but you haven’t read the graph in your link correctly – the average rate of wage increase is nearer 1 per cent per year.
      This is precisely what wage repression looks like.

    2. Irrational

      Yes, but there is a huge accumulated backlog that a couple of years’ of wage increases greater than inflation will not fix.

  9. McWatt

    The last time the German manufacturing oligarchs were running the show didn’t turn out so well for the world.

  10. EmilianoZ

    What this article fails to say is that Germany has not gone through a housing bubble, which is pretty unique in the western world. Since most of our salary goes into paying the rent or mortgage, that means that even with lower salaries, the Germans are still better off than us.

    Instead of accusing the Germans of repressing salaries, one could also accuse the others of allowing or even encouraging the recent extraordinary housing inflation. Surely some really stringent and generalized rent control and housing guaranties for the homeless could have taken care that.

    1. Sam Kanu

      And they did not allow their banks to over-lend for housing. A pity though that they let the same banks go nuts on risky lending abroad to the likes of Greece. The “export” obsession strikes again.

      1. Ichabod Kahn

        Germany didn’t have its own housing bubble perhaps because home ownership has traditionally been low in Germany, around 42% by comparison with 63% in the US before our bubble. But the German banks nevertheless did fund housing bubbles in countries like Ireland and Spain by lending to the banks in those countries.

  11. JTMcPhee

    “We” don’t, and won’t, ever get it. F__k “growth.” And f__k “market,” and “trade,” and “finance.” All of it. Gaia is about to puke up and expel the hairball called “modern civilized sophisticated humanity.” Good thing rats and roaches subsist quite nicely on human offal.

    Who’s got any kind of effective new paradigm that is other than tinkering with the steam gauges on the Titanic’s boilers?

    1. susan the other

      My other source of otherwise unmentioned tidbits is France24’s Debate. Last nite they debated whether China caused the market crashes in Europe and the US and one panelist said probably not. Because it has been agreed among nations that a maximum 2% growth rate is sustainable and every nation is downsizing, including China. And no politician will discuss this at all. So in the process of downsizing all our old delusions will be washed out to sea, without it ever being admitted to.

      1. James Levy

        I wonder if that is wishful thinking on the part of the person who made the statement or a known fact? It is possible that at all these summits that never seem to produce any tangible results global elites may be saying that forced contraction of the states under the austerity regime plus an endless recession in the larger countries can stave off the worst effects of climate change until technologies promised them by the latest batch of Dr. Strangeloves bails the human race out. We may never know.

    2. Synoia

      Gaia is about to puke up and expel the hairball called “Civilization.”

      I agree. And made it shorter. And I’m very gloomy about the prospects, and am planning to move to a location with abundant rainfall, higher than 300 ft elevation, and non-English speaking.

      That I may survive will be a miracle. But I will try.

      IMHO the best place to go and survive is the eastern highlands in Africa, the belt from Swaziland to the Ethiopian Highlands. except…

  12. phichibe

    Since the beginning o/t Eurozone crisis I’ve suspected that the root of much of the problem was that the Mark was brought into the Euro at too cheap a level, giving German exports an unfair advantage. I think the Germans got the French to go along because of French pride and IIRC at the same time Italy was dealing with the Grand Buffo Berlusconi, who makes Donald Trump appear a serious thinker, so it was clueless as to what Germany was pulling. The Germans incorporated the 14 million East Germans by dint of stealing employment from its trading partners, and by the end of the 1990s had a cheap Mark w/which to argue for that as the natural level at which it should be incorporated into the Euro. I’ve seen economists like Joe Stiglitz (IIRC) argue that rather than Greece leave the Euro, Germany should. Better late than never, I guess.

    P

  13. Vincent

    People in the Netherlands, Belgium, Luxemburg, France, etc. who live near the border with Germany drive to Germany to shop because EVERYTHING there is noticeably cheaper. That’s information I’ve picked up in conversation which I can’t testify to firsthand but which I accept as fact because it comes from so many varied sources. Can anyone explain what the mechanism might be behind the differences in prices? As remarked in this thread, it is striking that Germany did not experience the enormous upward pressure on the price of real estate, though Berlin seems to moving quickly in that direction (and elsewhere in Germany?). The percentage of homeowners is lower than in the neighboring countries. Any shack in Luxemburg is now worth almost a million euros!

    1. Irrational

      Insane real estate prices in Lux are due to tightly controlled release of land for building which makes for high land prices. In the last couple of years there have been some improvements, but still a long way to go to keep up with population growth.
      Re. shopping: Germany is cheaper due to low wages although the minimum wage recently introduced in Germany is making a dent. We still go there for the choice and the superior service (yes, I am not kidding!).
      To add to the anecdotes: If you want a plumber, carpenter etc., call a German, the others are – vastly generalising – too rich to bother coming unless you have a big job.

      1. Mike G

        Re. shopping: Germany is cheaper due to low wages although the minimum wage recently introduced in Germany is making a dent. We still go there for the choice and the superior service (yes, I am not kidding!).

        Superior German “service”? The clerks just glare at you now instead of telling you to F* off?

        1. Leo

          In the last 2.5 years living in Germany I can’t say I’ve encountered much rudeness. Generally very polite if sometimes a little abrupt.

  14. washunate

    This is a fascinating read. It feels like an educated Anglo-American applying value judgments instead of describing the situation. I’m all for critiquing the Germans, but this is a rather lengthy post to ignore what is actually going on. Is the author aware of all the history and efforts around German unification or the joint Franco-German effort of the past half century to ensure war in the ‘ole Carolingian empire doesn’t happen again on the scale of the destruction over the past thousand years? Does the author even know that ERM started in the 1970s; it was West Germany’s currency that was originally fixed to the franc.

    The Federal Republic has a for more equal system than the U.S. Of A. Maybe when we have universal healthcare, wind and solar energy crisis-crossing small towns, six week paid vacations, a real nationwide rail network…we can talk about what the Germans ought to do.

  15. TG

    An intelligent piece, but sadly, the elephant in the room remains unmentioned.

    A key part of suppressing German wages has, of course, been a massive and accelerating importation of foreign labor. Nobody beats supply and demand, sorry. Increase the number of people competing for every job and wages will be suppressed even if productivity is increasing. Workers only get wages in line with productivity increases if a tight labor market forces employers to do so.

    What, you say that Germany needed to import all these foreign workers to keep it’s economy going? If by ‘keep it’s economy going’ you mean ‘rely on a model where wages are suppressed’, well, yes. As far as needing to import foreigners because of the low German birth rate, that’s backwards. Germany’s birthrate is low because it’s getting harder for workers to start a family. Recall that in the great depression, American birthrates plummeted, but they picked up when times got better. Without massive increases in foreign labor Germany’s low birthrate would be a strong stimulus to wage increases, which would eventually cause an increase in birthrates – although not enough to drive down wages.

    American didn’t go extinct during the great depression because of temporarily low birthrates. It just meant that when things got better wages would shoot up. No society in all of history has ever ‘run out of workers’ because of low birthrates – but sometimes you get prosperity. The ‘running out of workers because birthrates are low and therefore the rich need to control population growth the same way that they control the money supply’ meme is a toxic myth – and should outrage all who feel that human beings are not domestic animals.

    This allergy to mentioning the deliberate use of demographic forces by the elites has been created by the post-1970 hammering that any mention of this is ‘racism’ is a serious problem. It’s not just affecting Germany. For example, in India there are 1.2 billion people and half of them are chronically malnourished, with a standard of living inferior to late Medieval Europe. And I blame not the Indian people, but those who have clouded the issue and distracted us from basic Keynesian economic principles, because nobody can be blamed for making a poor decision if they are misinformed of the consequences.

  16. anng

    I agree with Tom @ August 22, 2015 at 7:47 am. This article is devoid of the quality and reliability values that make German goods and it’s economy worth having, despite high prices. Rule of Law, lack of corruption and Property Rights are the most important things for stability.

    For example, “Germany’s reliance on foreign demand for its exports drained spending from elsewhere in the eurozone and slowed growth in those countries.” should read:-
    “Germany’s higher value-for-money propositions plus the cheap availability of credit from northern countries drained spending from the badly run countries of Greece, Italy and Spain”

  17. anng

    To add to my previous comment , I buy trousers and shoes from Germany which cost twice as much but last 10 times as long as the current output from our current British manufacturers. Unfortunately, the quality British manufacturers were hit hard by taxes and wage rises which caused them to out-source to Asia for an inferior product, while Germany continued to keep their quality family firms.

    I’ve no idea why the difference – but it’s possibly something to do with differing attitudes after the war.

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