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.