What's Good For Germany Is Good For The World

Includes: EWG
by: Scott Sumner

Matt Yglesias expresses a widely held view:

6. A "grand coalition" is probably better for the world: The main German parties do not have America-style sharp ideological disagreements on economics issues, but an SPD entry into government would probably add to the current pressures on German firms to raise wages. Higher German wages and a more rapidly unraveling of German's low-wage export-driven growth strategy would be in the interests of German wage-earners, but also of other people around the world. Higher German earnings would lead to more demand for foreign-made goods and services and also create more opportunities for French or Spanish workers to compete for jobs on the basis of pay.

I have several problems with this argument. First of all, I see no evidence that Germany's current account surplus is in any way related to its wages. The Nordic economies plus the Netherlands and Switzerland have large CA surpluses, indeed generally much larger than Germany, on a per capita basis. These are the economies most similar to Germany. But they don't have low wage policies. Second, unless I am mistaken, wages are not particularly low in the key German export industries like autos and machines (someone please correct me if this is wrong.) Germany has a large CA surplus for the same reason that other countries do, they save a lot relative to their investment levels.

Germany's labor reforms of the early 2000s were an amazing success. Many people think they failed, and point to the large number of very low paid jobs in Germany. This is a common logical error, forgetting that all policies fail if the criterion is a problem-free world. The only valid way of measuring the success of a policy is to compare it to the alternative. Before the labor reforms Germany had very high unemployment. It no longer does, despite the severe global recession. That's all you need to know. The German government has an extensive welfare state with lots of wage subsidies, so the low wage workers in Germany are not starving. Alternatively, who has a brighter future; Germany with 7.7% youth unemployment, or Greece with 62% youth unemployment?

Some might argue that the ECB's tight money policy is good for Germany but not good for the eurozone. Not so, in the long run Germany would have been better off with a faster rate of NGDP growth in the eurozone. German banks and German taxpayers will eventually absorb huge losses from defaults in southern Europe. The problem is not going away, and it is clear that tight money caused great damage to the entire eurozone.

But let's not destroy the one success story in the eurozone. A healthy Germany supplies more tourists to Greece and Spain, and buys more luxury goods from Italy.

It's not a zero sum game. If every country tried to make its economy as healthy as possible, with no concern for the rest of the world, we'd be much better off. In other words, a world of 200 Switzerlands would be a far happier place than the current world we live in. Indeed countries that (correctly) look out for their own welfare are led by a sort of "invisible hand" to do policies that also are in the best interest of the global economy.

Exceptions? The only one I can think of is carbon taxes.

The real problem is that most countries don't know what's in their own interest. Greece doesn't understand that it's in Greece's interest to privatize and deregulate. Germany doesn't know that faster NGDP growth in the eurozone is in Germany's interest.

TheMoneyIllusion.com officially endorses the Free Democrats in today's election. If only America had a parliamentary system where the swing party was always a socially liberal and fiscally conservative group. I could actually vote for someone without holding my nose.

I need to remember to wear my yellow shirt today.

Visit Website

About this article:

Tagged: , , Expert Insight, Germany
Problem with this article? Please tell us. Disagree with this article? .