Pulling Down Germany to ‘Rescue’ the EU?

Bizarre Economic Theories On the Rise

By Pater Tenebrarum

It is really astonishing what passes for 'economic logic' these days. A favorite mainstream meme regarding the euro area is the perverse plan to make things better for everyone by making them worse for Germany. You would think that our bien pensants should be happy that Germany's economy is fairly strong, considering that it is supposed to bail out all and sundry. Not so. Instead it is held that Germany's success, especially in terms of foreign trade, comes at the expense of  everybody else and therefore represents everybody else's loss.

The tenacity with which such mercantilist fallacies are clinging to the minds of people is simply incredible. First of all, 'nations' don't trade with each other – people do. National borders are entirely incidental to this fact and possess no particular economic significance. Secondly, there are no 'losers' in voluntary trade; every trade is mutually beneficial. If it were not, the parties concerned would not engage in trade with each other. What's so hard to grasp about this? 

Keeping the above in mind, here is what the EU's social affairs commissar Laszlo Andor thinks, according to Der Spiegel: 

“European Union Social Affairs Commissioner László Andor is calling on Germany and other euro-zone donor countries to change course in combating the European debt crisis. Austerity in Southern Europe alone will not fix the problem, Andor told the German daily Süddeutsche Zeitung in an interview published Monday — the north also needs to spend more. He suggests shifting the focus from reforms, austerity and consolidation of national budgets toward economic stimulus."Saving alone does not create growth. That requires additional investment and demand," said Andor […]

He argued that Germany should increase wages in order to stimulate domestic demand, and that a broad-based minimum wage should be implemented. Germany currently has no standard legal minimum wage, with pay levels often determined through collective bargaining agreements within individual industries. Last week, the announcement that a minimum wage of €7.5 ($9.8) in the western part of Germany and €6.5 in the east would be established for barbers and hairdressers made national news.

"Belgium and France have been complaining about German wage dumping," Andor added.

Because of Germany's high export surpluses, argues Andor, it isn't justifiable for the country to have an unfair competitive advantage on wages.Countries with export surpluses must adapt, just as the debtor countries have been forced to do, the 46-year-old politician said. "If not, the currency union will drift apart. Cohesion is already half lost." 

(emphasis added)

Wage dumping! Now we've heard it all. Of course it should be clear that Germany's relatively better economic performance stems precisely from its – at the time highly unpopular – decision to reform its labor market. What Andor is basically saying is: others should not be 'forced' to reform their own sclerotic labor markets (after all, that might cause some short term pain, and we can't have that). Instead, Germany should ditch its successful reforms and make its own labor market as inflexible and expensive as those of the others. Brilliant idea! When he talks about 'stimulus' he means of course that more government spending is needed. Right, let's spend more of what we don't have on stuff that no-one needs or wants, with bureaucrats directing the spending. That's going to work for sure!

Minimum wage laws are the major reason for the extremely high levels of institutionalized unemployment in countries like France. Already Germany has introduced minimum wages in several regions and branches of industry – in an attempt to buy votes launched by incumbent politicians afraid of losing power in upcoming elections. It is thereby in the process of relinquishing a major prop that was keeping its unemployment rate low. Unemployment in the industries concerned is now certain to rise, as unskilled workers will henceforth be priced out of the labor market. People like Mr. Andros seem to think that the laws of supply and demand are somehow magically suspended in the already extremely over-regulated labor markets, but this is not the case. 

The Bundesbank Isn't Having Any Of It

Luckily the Bundesbank isn't buying it, and rightly so: 

“Germany has come under criticism in recent years for its relatively restrained wage increases. Some politicians from economically weaker countries have argued that higher domestic demand in Germany would help the euro zone as a whole.

But Germany's central bank, the Bundesbank, warned in February against excessive wage increases, saying that if wages rise too fast, companies would reduce employment and invest less. Dramatically increasing wages would only temporarily boost consumer demand, it argued, and in the long run, real incomes and consumer spending would actually decrease. Ultimately, this would slow domestic demand and overall economic strength, experts argue. 

(emphasis added)

The Bundesbank is of course 100% correct with its assessment in this case. The boost to demand would be temporary and would soon prove to be an illusion. No permanent gains could possibly be achieved by it, on the contrary, the long term consequences would be to once again render Germany an economic basket case. Surely many people recall that during the bubble era and prior to instituting its labor market and welfare system reforms, Germany was for many years widely referred to as the 'sick man of Europe'. At the time it was derided for not doing enough to improve its growth prospects. Now that it has achieved what its critics at the time correctly demanded, it is supposed to do the exact opposite! This is totally absurd. 

Andor also worries about a possible migration of workers within the euro area:  

“Andor also expressed concern that there could be mass migration to the north from the south of the European Union if the situation isn't improved. "Some people compare the situation to America in the 19th century, when there was a mass migration from the south to the prosperous north after the Civil War. In order to avoid this, it is necessary to create growth in the crisis countries," Andor said.  

(emphasis added)

For many years we have been inundated with the argument that the euro area is not an 'optimal currency area' because it inter alia lacks the labor mobility that is so clearly evident in the US. Now that this labor mobility is shown to actually exist, the EU is supposed to do what it can to 'avoid it'!

Of course we agree that it would be a good idea to bring the Southern European nations back on the road to growth. However, this cannot possibly be done by impoverishing Germany. Instead, the current misguided austerity policies must be replaced by rigorous and wide-ranging economic liberalization, decisive cuts in the size of governments and their spending, and a lowering of taxes across the board. And while we're at it, monopoly central banking should be rescinded and replaced with a free market in currency and the cartelized, over-regulated commercial banking system should be replaced with a free banking system.

That's how simple it really is.