Why Germany’s Rebound Is Not Such Good News

Wolfgang Munchau has an intriguing piece at the Financial Times debunking the idea the Germany’s recent peppy growth numbers are as salutary as Mr. Market seems to believe.

Part of his message isn’t necessarily all that surprising, and comes towards the end of the article:

….it is important to keep some perspective and not draw false inferences from the 9 per cent annualised growth rate during the second quarter. If you look at the period since the beginning of the financial crisis, Germany’s economic performance has been dismal. If you compare levels of gross domestic product between Germany and the US since the crisis, you find the US significantly outperformed Germany during that period. That situation may still be reversed if the US were to go into a double-dip recession. But the best judgment we can make now is that of Christine Lagarde, the French finance minister, in her recent interview in the Financial Times: Germany is recovering faster this year because it contracted faster last year, when GDP fell by 5 per cent. So far, this looks like classic dead-cat bounce.

However, the early part of the article discusses in some detail the fact that Germany has been able to run what amounts to an undervalued currency within the Eurozone:

One of the weirder experiences for anyone who lives in the eurozone is a visit to a German supermarket. I had the pleasure the other day, and found the general price level there to be a little over half of what it is in Belgium, Italy or Spain. This, of course, is just an unscientific guess. I also found price differences of some 30 per cent when comparing certain categories of goods on various Ebay sites in the eurozone.

These differences go some way to explaining the eurozone’s divergent economic performance, and give a pointer as to what to expect in the future. The really intriguing aspect of the divergences is not how they happened, but why they are not correcting themselves. We know how they happened: Germany entered the eurozone at an uncompetitive exchange rate and embarked on a long period of wage moderation. Macroeconomists would say Germany benefited from a real devaluation against other members. But while real exchange rates tend to move around, one would not normally expect extreme misalignments to be persistent. In this case, one would expect Spanish and Italian consumers to abandon their expensive retail stores and swamp German internet sites with mail order purchases, especially for durable goods. Eventually there would be some price realignment.

It is not happening.

You would also expect some pressure for realignment from the labour market. As the German export sector returns to full capacity, one would expect wage costs to rise by more than the eurozone average.

This is not happening either.

Yves here. Memo to self: buy on Germany’s eBay to do your part to help correct intra-Eurozone imbalances.

In all seriousness, it hadn’t occurred to me, and I suspect that it hadn’t occurred to most Americans, that the Eurozone as a trade area is much less integrated than the US. While the US does have substantial wage differentials for the same job, they are explained to a considerable degree by taxes and differences in living costs. And tales of Poles migrating en masse to the UK would lead one to believe that labor mobility would lead to a reduction in wage disparities, which would cycle back to both production costs and consumer demand. But this process is more limited than one would think:

While adjustment of the product side is prevented by an imperfect single market, adjustment on the labour market side is prevented by a complete absence of market integration. You would expect German workers to seek higher wages outside the country. But this is not happening, as the European labour market remains almost perfectly fragmented. That means German wage moderation can persist uncorrected for a long time. Nominal wages are effectively frozen, and are set to rise by only small percentages in the next few years.

Munchau then returns to a crucial point: that Eurozone imbalances (meaning Germany running a persistent trade surplus with the rest of Europe, which in turn requires some countries to consume and borrow, will continue:

This will make the economic adjustment for Spain, Portugal or Greece even more difficult than it already is. Those persistent imbalances, much more than the build-up of debt, are my deep cause of concern about the long-term health of the eurozone.

But from a German perspective, this strategy boosts growth in the short term. It is, of course, a beggar-thy-neighbour strategy.

This is not pretty, and there appears to be no end in sight. Expect more Eurozone stresses.

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  1. Thomas

    It’s nonsense that the price level in an Italian supermarket is twice as high as in Germany. As a German who frequently goes to Italy, my impression is that the price level of groceries in both countries is roughly similar if you go to the same kind of store and buy goods that are commonly used in both countries.

    1. Joseph

      agree with you, even local chains as Coop have correct prices; as it happens in Spain
      Another story is the quality of items, normally very good in the mediterranean in vegies and fruits
      This story that the US outperforms Germany in growth, seems a joke of bad taste
      keep well from Barcelona

    2. Sam

      Agreed. I actually find a lot of stuff cheaper in Spain than in Germany, at least when you go outside of the busiest tourist areas.

  2. Thomas

    For instance, the German discount chain Lidl has a lot of stores in Northern Italy. It does not seem to me that prices at Lidl Italia are consistently higher than at Lidl Germany. Maybe for some goods, but not for others.

  3. Daniel de Paris

    I would certainly agree with the premises that China and/or Germany rebounding are, first and foremost, a display of increased financial unbalances…

    Yves here. Memo to self: buy on Germany’s eBay to do your part to help correct intra-Eurozone imbalances.

    Tried here from France on a routine basis! The “do-it-yourself” job will confirm the analytical framework.

    Ebay Germany is a wonder to buy from for any Eurozone ebay-er. And, yes, ebay.es stuff is, when available, absolutely not competitive.

    It is (the German industrial strategy), of course, a beggar-thy-neighbour strategy.

    I do not acccept this conclusion though. South of Europe has to cope, lower their prices and, yest, have something to offer for your bucket of Euros. And not only over-priced and un-needed bricks-under-the-sun. Or Santander like bankers by the way….

    The PIGs are not! Do not underestimate the ability of these countries, once under very rough pressure. As any by the way. But, yes, you need a rough presssure.

    A very rough financial pressure indeed. That implies some social disorders. But do not “read” Southern EC as the pre-1940 one. These are now relatively bourgeois countries with a decent social structure. They won’t break the way our dear Ambrose expect them to.

    Does not mean that some monetary adjustments are not required by the way!

    1. Joseph

      AEP, dear Parisian, what he wants is cheap hollidays and even cheaper plonk; combined with the supremacy of the anglos and an incredible ignorance on southerneuropeans ( culture and language)
      Thats his problem, not ours; isnt it?
      We honestly have other problems over here, such as to keep alive as middle class and get rid of oligarchs; We are in it, although is not in the Media

    2. Sam

      You have to take into account that this blog is for some reason biased against Germany and thus any bad consequences that happen to the PIGS because of their unsustainable ways will be blamed on those evil, stuff producing Germans.

      1. Joseph

        Yes Sam, I agree; its Germany’s fault to be too good, and to produce goods with excelence that everybody wants to buy¡¡

  4. Mat

    Interesting theory. And how about German house prices? Affordability remained high, with stable prices after 1990’s; even during the price boom in other European coutries in the same period. And what about car prices? Really low, compared to my tax levereged Netherlands. So the analysis of the high purchasing power but low labour costs might be correct, even if it isn’t for supermarkets!

  5. Kevin de Bruxelles

    Here are the results of a slightly more scientific study on food prices in the EU:

    The survey results are expressed in ‘price level indices (PLIs), which are calculated as a country’s purchasing power parity (PPP) divided by its annual average exchange rate. PLIs are then used to provide an indication of a country’s price levels compared to a European Union average.

    Using this measurement, Denmark was found to be nearly 40 per cent above the European average, while Ireland, Finland, Luxembourg, Austria, Belgium, Germany and France were between 10 and 30 per cent above average. Italy, Cyprus, Sweden and Greece were up to 10 per cent above the average.

    On the other end of the scale, the Netherlands, Spain, the United Kingdom, Slovenia, Malta and Portugal were up to 10 per cent below average. Latvia, Slovakia, Estonia, Hungary, the Czech Republic and Lithuania had price levels for food and non-alcoholic beverages which were between 10 and 30 per cent below the European average, while Bulgaria, Romania and Poland were between 30 and 40 per cent below.


    One also has to take into account food culture. In general, Latin countries, who often see food as an art, prefer higher quality products than the Germanic countries; who generally see food more in a utilitarian light. Of course this is a gross generalization and with the ongoing Americanization of Europe, the Latin countries are slowly losing the edge from their food culture.

    1. SidFinster

      Trying to solve the ancient problem of “Why are Germans so obsessed with buying the cheapest food possible, but at the same time their kitchen equipment is the most expensive anywhere?” I concluded that:

      a) food is a consumable, and hence to be economized as much as possible.

      b) kitchen equipment is a durable good and therefore to be bought on the basis of “Preiswertlichkeit” or whatever the term is in German.

      In other words: if you eat 300 grams of sausage a day, you save money if you buy Aldi Mystery Meat Brand as opposed to some expensive artisanal regional sausage made from selected parts of organically fed heirloom breeds.

      On the other hand, if you buy a cheap saucepan, soon you will have to buy a new one. This costs more money long term.

  6. IF

    Yves, if you don’t want to order from the German eBay, you might want to go shopping at your local Trader Joes. Plenty of inexpensive German products there. But if you ask nicely they might even charge you double the price for each item. After all, you seem to like it that way…

  7. Patrick Schmidt

    Why most commentors fail to mention or understand are the cultural values that guide people’s behavior.

    As an American, I have lived and studied the German culture for over 30 years. Germans, simply put, are highly, if not ruthlessly, efficient in their manner of accomplishing tasks. There have a proverb “Dienst ist Dienst, Schnapps ist Schnapps” which, roughtly translated, means ‘first work, then pleasure’. In another words, they don’t chit-chat when working.

    I have a British entrepreneurial friend who started a manufacturing company in France some 20 years ago. About 7 years ago, he bought a factory north of Dusseldorf that manufactured the same products. And 6 months of the purchase, he came to the realization, as he told me, that what the French accomplished in a 11 hour day, the Germans performed the same task in 7 and half hours.

  8. Michael

    That’s true, but French executives know that very well (have a look at comments about Germany on lemonde.fr, leschos.fr, latribune.fr) and are prepared to work 11 hours a day.

  9. Fred Heutte

    Based on my own anecdotal experience spending a fair bit of time in Denmark, UK, Germany, Spain and Netherlands the last year, and considering prices in categories like hotels, restaurant meals, taxis and computers, I would say they rank roughly in that order.

    Denmark (and all of Scandinavia) is just ridiculously expensive by any standard, but it’s even more in Sweden, where I paid about $33 US for a cab ride under 3 km (and definitely took the bus thereafter) in Malmö across from Copenhagen, and passed up the $10 US Big Mac in the little mall for the (better tasting and) cheaper doner kebab at the stand across the street. Mind you, this was last winter and the Swedish krona SEK has shifted in value (it floats separate from tbe Euro while the Danish kroner DKK is tied).

    The UK is definitely above Germany in cost, certainly for hotels, and I also think computers (as an example) are about 20% more, comparing prices at places like Antika and the others on the famed (and viciously price competitive) row of shops on Tottenham Court Road in London, as compared to say Karstadt in Bonn or Paradigit in Amsterdam where I bought my current netbook after the old one died.

    In general I’ve found Amsterdam the best value (which is good because I like it the best, with London in second place), the prices are moderate and things like ice cream cones are really good and cheap. (Of course you have to factor in the Common Agricultural Policy in considering food prices anywhere in the EU). The CAP is about half the EU budget but going down rapidly in the coming years.

    I generally drink Belgian beer in Amsterdam because I’m not that fond of Amstel or Heineken, but the price is great, maybe $3.50 for a nice glass of De Koninck. And Germany? Beer is cheap and great, no more needs to be said. Whereas the rather ordinary (to my taste) Tuborg or Carlsberg in Copenhagen is, yikes, around $10.

    But the point Yves made is right — the price variations across Europe (and I’ve basically only been in one quadrant) vary much more than we are used to in a national market like the US.

  10. richfam

    You should have called this: “debunking the myth that Germany is growing faster than the U.S. due to less government intervention”. That’s your point, right?

    1. St.John

      Sorry, but Germany had more government intervention into the economy than the US did. Most of US “intervention” was into finance NOT the economy.

      Matter of fact, if the EU falls, so does Germany.

  11. koshem Bos

    My experience this summer from several weeks at the Costa del Sol and several weeks in Berlin is that supermarket prices are about the same in both locations. Farmer Market prices are lower in Spain than in Berlin. (Didn’t shop for anything else.) My many years in Portugal, I can flatly say that same holds for that country too. Of course, all these comparisons constitute a single observation and do not generalize.
    I find the supermarket, i.e. food, prices in Europe much lower than the corresponding US prices; this is something I don’t understand since most food workers in the US are paid close to minimal wage and German food workers, for instance, are paid way more.

    1. Tortoise

      I spent a couple of months in Europe, in three different countries. I strongly disagree that supermarket prices are higher in the US than in Europe. In fact, I would say that supermarket prices are 20-30% lower in the US than in Europe — I am excluding boutique-style markets and specialty items. You can debate issues of quality and so on, but in terms of price of meat, poultry, bread, pastas, canned goods, etc., there is no way that the US supermarket is more expensive than the European. And if you choose to buy at COSTCO, you end up buying Italian olive oil cheaper than you find it in Italy and Swiss chocolates (when they have them) cheaper than you find them in Switzerland.

  12. Jackrabbit

    It used to be that cheap consumer/business credit fueled the trade imbalances. Now governments, attempting to “right the ship,” are supporting those imbalances.

    That ship was always leaky. It was built at the behest of captains of industry that wanted the lowest possible labor costs.

    Too bad the ship has to sink before something is done. As with global warming and market bubbles, powerful interests block reform until it is too late.

    In the US, for example, we’d rather extend unemployment benefits and food stamps than stop China from dumping cheap goods. (And those on unemployment buy cheap Chinese goods so their benefits go further.) If we simply recognized that China is arb-ing our labor and environmental laws, we could get some industry back.

    1. St.John

      Actually, extending unemployment benefits is not popular at all. They want their cake(trade inbalances profitting the MNC’s and cutting off services) and ice cream.

  13. Psychoanalystus

    Regarding food…

    I share my time between the US and Europe. In large US cities you can find cheap independent grocery stores (often owned by Greeks or Mexicans). However, over the past few years I have observed large chains such as Altbertsons raise their prices steadily while dropping quality all around. Then you have places like Whole Foods, which are an absolute rip-off (I’m referring to their non-organic offerings), and where a loaf of bread costs $6 on average. Nonetheless, quality at Whole Foods (or “Whole Paycheck” a some refer to it) is far greater than anywhere else in the US.

    In Europe you have some really cheap joints like Aldi, some middle-of-the-road ones like Real, Billa, and Schpar, and the high price specialty shops. In Europe things like bread are much cheaper (and of higher quality) because there is a tradition in bread-making (something America lacks). Europe also has far greater food variety, while in the US you have the same crappy “Americanized” brands take up miles and miles of shelf space. Or example, most stores across Europe carry baklava (a Turkish/Greek delicacy), while in the US you can only find it in specialty stores.

    Pricewise, the US is pretty homogenous across states, with the small variation mentioned above. On the other hand, prices vary greatly across Europe, with Eastern Europe being significantly cheaper. However, with quality and food diversity being so much better in Europe, personally, I prefer it.

    Trust me, my friends, once you *truly* tasted authentic Southern or Eastern European food, you won’t be able to go back to Applebees… :)


    1. anon

      “most stores across Europe carry baklava (a Turkish/Greek delicacy), while in the US you can only find it in specialty stores”

      I didn’t realize that Costco, Trader Joe’s, Safeway, or Andronico’s were specialty stores. (Granted, the quality of the baklava can be mediocre, especially at Safeway, but it’s usually available. Very few things are always available at TJ’s or Costco, including baklava, but it’s at those stores more often than most of the dessert items except the Costco muffins @ Costco. Kim Chee, alas, is another matter. Costco almost always has it where I live but I’ve never seen it there when I travelled outside the area.)

      I agree that if you want decent bread in the part of the US I live in, you may need buy the small bakery breads at, e.g., Safeway or TJ’s, or (for a better selection) go to a bakery. The quality of the bread available at the bakeries varies but some is excellent and (IMO at least) far better than the average bread in France or the other European countries I’ve visited. (But not as good as the best French bread I’ve eaten.) Ditto for vegetables. Most people I know buy bread (including breads such as naan, tortillas, or empanadas), veggies, fruits, and food (e.g., prepared foods like tamales, pupusas, curry, gyros, falafel; cooking ingredients like infused or non-infused olive or other oil; organic salsas, chutneys, sauces, etc.) at local farmers’ markets. Every town has one that is open at least a half a day a week (and often more frequently or for longer hours) during the summer (generally from early May – mid-October). If the day or hours don’t work for the one in your town (or, e.g, in the neighborhood you work in), you go to one of the ones in a nearby town or the city.

      It’s unfair to equate US food with Applebee’s. That may be true where you live but please don’t generalize to the entire USA. There are too many variables (e.g., urban vs. rural vs suburban; size and concentration of metro area; geographic location; climate; ethnic makeup and distribution of origin, number, and concentration of recent immigrants; economic conditions; etc).

      1. Psychoanalystus

        You might be able to find baklava where you live because of the ethnic makeup of the neighborhood.

        I lived for many years in New York City and Chicago, where you could find quality and diverse types foods. But my years in Memphis, Florida, and St. Louis were another story.

        I do like Whole Foods’ bread, except for the price…


        1. anon

          That was why I replied to your post. You made overgeneralizations about the types and quality of food available in the US (or at all supermarkets in the US). (e.g., “quality at Whole Foods . . . is far greater than anywhere else in the US.”, “most stores across Europe carry baklava (a Turkish/Greek delicacy), while in the US you can only find it in specialty stores.”, “In Europe things like bread are much cheaper (and of higher quality)”, “Europe also has far greater food variety”). Those statements are probably true in some parts of the USA (and may be true about most of the US – I don’t know because I have not lived in most parts of the US). However, I don’t think it’s fair or accurate to say any of that about the entire US.

          1. Psychoanalystus

            For many years I’ve been living 6 months in the US and 6 months in Europe. I know both places well, and as people here know, I am an equal-opportunity critic of both.

            If you live in a small-to-medium size American town or in a suburb, you’re stuck with places like Albertsons and Kroger, where you have miles and miles of shelfspace of garbage such as hormone-infested meat and milk (for a morbidly obese population), as well as genetically-modified cereal (for our kids’ breakfast), plus tasteless fruits and vegetables of all sorts.

            At least in Europe there is still resistance to food produced by criminal corporations like Monsanto.

            My friend, Walmartization of America is real, and that covers the food sector as well. In Europe townships protect their small businesses and their local heritage. In America, Walmart fought tooth and nail to plant their shit stores in the heart of Chicago. Same goes with Applebees, and the likes.

            In the US, unless you live in a big city, you’re stuck with Walmart, Applebees, and Albertsons. Oops, I forgot to mention Wendy’s…LOL


  14. Jim Haygood

    ‘I had the pleasure the other day, and found the general price level [in a German supermarket] to be a little over half of what it is in Belgium, Italy or Spain.’

    Let’s take a highly comparable consumer good — petrol (gasoline to americanos). The energy.eu site shows that German unleaded prices are actually higher than those in France, Spain and Italy.


    Germany’s price level half that of Belgium, Italy or Spain? Absurd! Wolfgang Munchkin is meshugge!

  15. George J. Georganas

    One must wonder how the FT allows nonsense such as supermarket prices being so much out of line accross Europe. Or about eBay prices in Germany being low. In fact, US eBay is way cheaper, even allowing for hefty VAT and shipping costs.
    I looked around and read a few more pieces my Mr Munchau. It seems the FT quality control has a broader problem.

  16. Lynell Daisley

    I’m living in Germany, but my parents – esp. my mother – have english forefathers. Thus I consider myself to be German with some Anglo-Saxon influence. This interesting ideas about the German way seem to be extremely unaffirmative to me; I’d strongly believe, American politicians could learn a lot from the way german society is handling its crisis in the moment.

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