The German Economy and the European Crisis

Even though most economic commentators focus on the deterioration of the periphery and are nervously taking note of how that is coming to impair the core countries, the strength of the German economy is nevertheless seldom questioned outside the Eurozone.

This Real News Network segment focuses on a generally-overlooked issue: wage suppression and the increasingly precarious conditions that German workers face, and how that plays into Eurozone politics. In July, we provided readers with an important report by Josh Rosner on the state of the German economy. From its executive summary:

Past Eurozone growth, particularly in Germany, did not come from meaningful improvements in productivity, but rather on the back of household wage reductions and industry-friendly reforms to the labor market – the Hartz reforms – which transferred wealth from the people to the banking and export-driven sectors of the economy.

While German and French taxpayers are justifiably angry, their anger is largely misdirected. Rather than embracing the false narrative blaming only peripheral nations for requiring bailouts, the anger should more rightfully be directed at:

• Designers of the European Monetary Union who, at the creation of the EMU, ignored regular and repeated warnings, from noted academics, analysts and policy advisors, that structural weaknesses would lead us to the crisis we now face;

• Banks, in the core, with weak internal controls and excessive leverage, which were profligate lenders in search of yield, to weak private, corporate and sovereign creditors in the peripheral countries;

• Those officials and technocrats who failed to properly regulate the domestic banking industry and allowed bankers to treat all sovereign debt as equal regardless of the differing debt capacity of the issuer;

• Rating agencies that failed to offer meaningful analysis of sovereign credit capacities and also assumed that too-big-to-fail financial institutions ratings should reflect an implied or explicit guarantee by their home country;

• Political leaders who, since the beginning of the crisis, downplayed its ultimate costs and, thus, delayed its resolution and increased the ultimate costs to taxpayers;

With this as a backdrop, it logically follows that the German government and central bank are seeking to protect the markets for German exporters and the German banking sector. Accordingly, the German government will be forced to choose either a large share of the costs of supporting a further integration of the European Monetary Union or, alternately, the larger economic and social costs of its failure, including the massive costs of recapitalizing German banks and financial support for German industry Either approach will lead to German debts rising markedly while its economy contracts. The costs will be astounding.

This report provides a useful perspective from within Germany, particularly on the need to move away from an export oriented economy and the obstacles to achieving that outcome.

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  1. Ruben

    It is an interesting view from the Left, I liked the leader speaking out her politiks, she is a good defender of the German lower classes. It should be noted though that the doomsday view of the German export-driven economic machinery that she portrayed (and the poster) is not entirely solid. Although most German exports still go to her troubled western European partners, this is changing, with effort being re-oriented to Asia and eastern Europe, especially Poland.

    and for a fancy map, see

    On the other hand, her call for improving the living conditions (i.e. the purchasing power) of the lower German classes is being heard, with some initiatives oriented to improve the contracts and salaries of temps and minijobs.

  2. Bert_S

    Well, I won’t dwell on the fact that I think I just heard the best labor conditions, relatively speaking, in our modern neo-liberal world. If Foxconn heard this they might kill themselves.

    But at this point, giving labor a raise isn’t gonna fix anything. The problem is somehow Deutsche Bank became the largest bank in the whole world, and I think Basel 2 capital rules (30:1 leverage) is the basic reason for that. And they must be doing something besides writing BMW leases to Greek peasants. And how much profit money German exporters “took” from the proles and deposited in the bank is minor if you can leverage it 30 times. But it would be a great opportunity to raise corporate taxes and redistribute it wherever it may need to go.

    I also don’t think German industry is overly reliant on exports to Portugal, Spain, Greece, or that place that also makes cars, Italy. So global economic slowdown ($55 Trillion) would be more of a concern to the export industry.

    So the big problem is, because of Deutsche Bank, Germany’s schnitzel is cooked already. This is where the tremendous bailout cost is, and then there is the problem of financial contagion with the French and English Basel 2 behemoths and all their silly loans and derivatives.

    Obviously, the leaders of Yurp realize they created “Too Big To Save” and that would explain a lot about the “gridlock” there.

    1. Dan_in_KC

      Mr. Shiller’s observations may be right to some extent but I think it fails to address WHY enough viewers would be drawn to the story unfolding in Greece to such an extent that the changes in their behavior would impact economies far afield from Greece. Failing to address the reason behind why so many would find that story compelling weakens the article.

      I think Greece (as well as Iceland, Ireland, Spain, and Italy) is compelling to so many because they have seen their own wages stagnate, jobs disappear, pensions erode, college and medical costs skyrocket out of reach, etc.. and what they see happening in Greece hits far too close to home. If the story did not hit their own jangled nerves so hard due to the associations it evoked with their personal situations then it is unlikely to (as he says) have ‘gone viral’.

  3. Tom

    Raising taxes on corporations fails to discriminate between those entities that are subtractive to the economy in there current form (gambling houses who call themselves innovative finacial servises companies) and commercial lenders. Corporations do not pay taxes at all – they transfer their tax obligations to the purchasers of there goods in the price of the product. Consumers pay all taxes.
    In spite of the ingenious methods devised by statesmen and financiers to get more revenue from large fortunes, and regardless of whether the maximum sur tax remains at 25% or is raised or lowered, it is still true that it would be better to stop the speculative incomes at the source, rather than attempt to recover them after they have passed into the hands of profiteers.
    If a man earns his income by producing wealth, nothing should be done to hamper him. For has he not given employment to labor, and has he not produced goods for our consumption? To cripple or burden such a man means that he is necessarily forced to employ fewer men, and to make less goods, which tends to decrease wages, unemployment, and increased cost of living.
    If, however, a man’s income is not made in producing wealth and employing labor, but is due to speculation, the case is altogether different. The speculator as a speculator, whether his holdings be mineral lands, forests, power sites, agricultural lands, or city lots, employs no labor and produces no wealth. He adds nothing to the riches of the country, but merely takes toll from those who do employ labor and produce wealth.
    If part of the speculator’s income – no matter how large a part – be taken in taxation, it will not decrease employment or lessen the production of wealth. Whereas, if the producer’s income be taxed it will tend to limit employment and stop the production of wealth.
    Our lawmakers will do well, therefore, to pay less attention to the rate on incomes, and more to the source from whence they are drawn.

    1. Bert_S

      “Corporations do not pay taxes at all – they transfer their tax obligations to the purchasers of there goods in the price of the product. Consumers pay all taxes.

      Believe it or not, I’ve heard that one before. I’ve always been amazed how corporations can pass thru at least 100% of their tax burden, and at least 100% (usually much more, using the burden rate) of their labor cost, but are easily able to “absorb” executive compensation expense and the consumer pays none of that.

    2. Darren Kenworthy

      You seem to be talking about the difference between profit (labor+capital equipment= excess value/profit) and economic rent (whatever can be extracted from consumers through control of something they need). When the price of a good is related to the cost of producing it, it makes some sense to say that adding to the cost of production will cause the price to rise. Consider the possibility, however, that virtually all large economic entities are in the business of charging economic rent. They always charge as much as they can regardless of what it costs them to bring the goods to market.

  4. Gerald Muller

    There is no doubt that Josh Rosner was quite right.
    I have always thought that the euro was the worst technocratic contraption in the last 20 years (at least).
    Regarding Germany, you only have to see the millions that shop at ALDI discount stores to realize that a lot of Germans are poor and, it seems to me, getting poorer.
    Even though I am far from liberal (in the US sense) and more liberal in the Ludwig von Mises sense (that of the XIXth century), most of what this lady from “Die Linke” said made sense to me.

    1. curlydan

      I have to say that ALDI is one of Germany’s greatest exports to the U.S.! The poor and frugal in the U.S. pour into ALDI as well.

      1. Jim

        Doesn’t the German middle-class also shop at Aldi?

        I recall reading a note about Wal-Mart’s failure in Germany due to offering too many brands of the same food item.

        1. genauer

          the german middle classs shops at Lidl and Aldi, Netto, …

          Besides the green/bio folks who are happily paying twice the price in their shops. If they feel good about it, and can afford it, let them : – )

          The way I remember the Walmart disaster in Germany, is that they didnt want to accept unions and worker council elections, a point of german law that was driven home to them by German police enforcing German labor laws. I guess this was a little too much surprise for them : – )

    2. Jim

      I emphatically agree.

      But I do wonder why so many on the center-left support the EZ. The only way it can survive is via suppression of democracy.

      Is that what progressives want?

      1. cirsium

        “the EZ. The only way it can survive is via suppression of democracy.”

        so true Jim. Are the centre left parties who support the EZ really left wing (in the twentieth century sense)? A comment which I read here at NC some months ago said that currently we have gone beyond left/right. A more accurate description would be
        1. the neo-liberal consensus v democracy
        2. the establishment v civil society

        thanks Yves for this post on the situation in Germany. Very interesting and informative.

  5. Susan the other

    Die Linke sees the same thing we see. Deutsche Bank is a casino just like JPMChase. None of the big banks being bailed out are worth it. Germany is not in a good position. They aren’t admitting their banks are insolvent (gee really), their EU exports have evaporated, and China is slowing down its imports. The truth is, Germany can’t bail out Germany let alone Spain and Greece. It would be good if we all admitted that everything has changed and will never be the same. So bailing out banks so rich trash can gamble on pointless odds is pure extortion. And Merkel’s brave fiction about “international creditors” analyzing the creditworthiness of countries is sounding very offensive in light of the bluff they (the banks, aka “international creditors”) are running.

    1. Tyzao

      I’m waiting for the (lokal amtsgericht) order against Deutsch Bank for holding part of a RMBS on a single piece of property, in the USA.

  6. craazyman

    whoa! I’m in love! Never thought I’d fall for German politician. Wonder if she’s on eHarmony? haha. She kind of looks like Rapunzel with that thick hair. And she seems like she knows what she’s talking about. That’s amazing.

    Usually German politicians look like some fat dude you’d see at the Elk’s Club Bingo with one hand on the belly and the other on a beer. How their wives do it, I can’t imagine.

    I couldn’t imagine making a speech to the German parliament either. What is there to say when everything is so obvious? I guess you have to figure that out when you’re a politician — it’s not as easy as just ranting like a fool — but I think a lot of people would just turn off the sound and make the words up like a cartoon. They might even follow along with the gestures. It gets that way when things are so obvious and you’re just dumfounded and a little drunk.

  7. genauer

    isnt she a cutie, Sahra Wagenknecht, the wiedergänger of Rosa Luxemburg. She can even cite “Faust” from Goethe, and enthusiasm about the money printing theme in the formerly conservative FAZ.

    I will read her PhD thesis, should be accepted by now. I doubt it very much that she is doing a “Gutenberg”

    The movie is a nice piece of socialist propaganda. Kind of interesting to study the handywork. Pretty interesting how the looks impress people here.

    1. sidelarge

      Re-read what you wrote, and feel the irony, particularly of the first sentence of the last paragraph. Ad hominem is one of the prime tactics of that p-word.

  8. TC

    Spot on. I was aware of Germany’s real world troubles at the alter of imperial slaughter prior to this report. Time to convert Opel to a tank factory I guess.

  9. Tyzao

    The Charite in Wedding is a fine hospital as well, recovered from Malaria in that place, nothing but good things to say about the fine people there.

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