Along with last week’s news of Germany’s record trade surplus , the opening of an EU investigation into Germany’s growing surpluses , and Europe’s other recent remarkable socio economic  achievements, Angela Merkel made an announcement on Friday regarding her party’s plans for Germany’s economic policies that might actually be good news for Germany and the rest of Europe: She’s urging her fellow CDU member to compromise on an across-the-board 8.50 euro German minimum wage over the CDU’s long-standing position of no minimum wages and instead agreements negotiations by economic sectors and region  (wage agreements that often aren’t adhered to ). A big change to Germany’s minimum wage laws could be coming as the price of an SPD coalition with Merkel’s CDU. Better late than never :
Merkel ready to cede on minimum wage to secure coalition
BERLIN Sat Nov 16, 2013 9:43am EST
(Reuters) — German Chancellor Angela Merkel has signaled her readiness to accept the Social Democrats’ (SPD) demand for a legal minimum wage in order to secure their agreement to form a governing coalition, as negotiations enter the final stretch.
Merkel began preparing her conservatives for a compromise by telling a Christian Democrats (CDU) youth rally late on Friday that the 8.50 euros per hour pay floor which the SPD demands “will play a role” in future.
“It won’t be our vision of a minimum wage,” she added, conceding her party was unlikely to get its own way over the SPD on the issue.
Merkel wants to form a government by Christmas and talks on policy compromises should culminate in the next 10 days.
The SPD has given up its campaign promise to hike taxes on the rich but will not budge on the minimum wage. Nearly half a million SPD members will vote on the coalition deal by early December, injecting more uncertainty into the whole process.
The conservatives are in favor of setting minimum wages — but on a sector-by-sector basis, at levels agreed by employers and workers rather than decided centrally in Berlin. For the SPD, it is 8.50 euros across the board — or no coalition.
“Now you have to deliver, dear conservatives,” SPD Chairman Sigmar Gabriel told a party congress in Leipzig on Saturday.
Merkel’s parliamentary leader Volker Kauder also prepared for a compromise by telling the mass-circulation Bild am Sonntag paper, in comments released before publication, that “growth and employment must not suffer” from its introduction. Some business leaders are worried that it will undermine competitiveness.
Kauder said it might be wise to introduce the minimum wage more gradually in the former East Germany — where pay is lower and unemployment higher — to avoid putting jobs at risk. But trade unions who back the SPD might find that hard to accept.
No tax hikes on the rich but an across the board minimum wage: The joys of compromise! It also remains to be seen how permanent these changes will be if they’re implemented. As Merkel puts it, the minimum wage “floor” is not in the CDU’s “vision”. Is this going to be a temporary minimum wage “floor” that only lasts through the duration of the coalition? We’ll have to wait and see. But it’s good to see the SPD make an across the board minimum wage a basic demand for to joining the CDU in a coalition (East German workers should probably breath an extra sigh  of relief ). 8.50 euros/hour is higher than in many EU countries and actually 45% higher than the minimum wage in the US (that’s not as impressive as it sounds ). And if the views of Germany’s business leaders and chief economists  are any indication of what we can expect from Germany’s economic establishment going forward, a national minimum wage is going be treated like national cancer :
Reuters The Great Debate
Will a minimum wage destroy German jobs?
By Peter Gumbel
November 7, 2013
Germany has once again become the world’s favorite whipping boy, roundly criticized over the past few days by the U.S. Treasury , a top International Monetary Fund  official and the European Commission  president, among others, for running record trade and current account surpluses that are supposedly detrimental to the European and global economy.
The arguments continue, with the Germans themselves saying  that the surpluses are simply the happy result of the nation’s industrial competitiveness and don’t hurt anyone else. Lost in the debate, however, is what’s happening in Berlin right now. As Chancellor Angela Merkel seeks to form a new coalition government, she appears to be on the verge of throwing out some of the very policies that underpin the export boom of the past decade.
Most controversially, the new government to be formed is likely to introduce a minimum wage, a novelty for Germany, and a move that both symbolically and in reality would herald the end of the tough wage restraint that has characterized the past decade. A range of social policy changes, including a possible reduction in the retirement age, are also being discussed, as is higher government spending.
It’s not clear whether such shifts would provide the boost to domestic spending that the U.S. and Germany’s other critics are demanding. But their very prospect is sending chills down the spines of German business leaders. Ulrich Grillo, president of the Federation of German Industries , warns that “Germany can’t afford a grand coalition of election gifts,” and says that the politicians are acting as though Germany’s continuing prosperity is a given, rather than something that needs to be worked at.
Deutsche Bank says flatly in a research report  that the proposed minimum wage is “the wrong policy choice.”
The shifts in economic policy are coming about as a result of political necessity. Merkel scored  strongly in the September 22 parliamentary elections, but her Christian Democratic Union party didn’t win enough votes to govern alone. The party’s top officials have spent the past few weeks locked in negotiations with the opposition Social Democrats over the shape of a coalition government, and they have already given way on a number of points, including the introduction of a minimum wage of 8.5 euros per hour (about $11.50 at current exchange rates).
Germany is unusual in that it doesn’t currently have a national minimum wage; pay scales for different industries are traditionally fixed by management and union organizations, in regular rounds of negotiations. Two elements of the planned minimum wage are notable. The first is the level being proposed, which is 45 percent above the U.S. minimum wage — considerably higher than that in some other European countries such as Spain, although below France and the Netherlands. The Hans Böckler Stiftung’s Institute of Economic and Social Research has a handy guide to minimum wage rates around the world here .
The second notable element is its expected broad application, across the whole of Germany, East and West, and including new entrants to the job market. This amounts to a rollback of the stringent policies put in place by Merkel’s predecessor Gerhard Schröder, starting in 2002, at a time when the German economy was struggling to digest the impact of reunification after the fall of the Berlin Wall.
Schröder, a Social Democrat, worked together with the former head of human resources at Volkswagen, Peter Hartz, to devise policies that created jobs, in part through the introduction of low-paid “mini jobs” that were exempt from social security charges. These were designed to get hard-to-employ people back into the workforce. The result has been spectacular: Germany’s current unemployment rate, of just over 5 percent, is half what it was a decade ago, and far below the 12.2 percent average jobless rate in the euro zone. And German productivity gains since then have far outstripped the modest rise in unit labor costs, propelling the current export boom.
Currently, about 12 percent of workers in Western Germany earn below 8.5 euros per hour, while in the eastern part, the figure is about one in four, according to research by the IWH institute in Halle.
Deutsche Bank is now predicting that the planned minimum wage would reverse some of the beneficial effect of the Hartz reforms and would likely increase labor costs generally, because the 8.5 euro level would be close to the median wage. The bank estimates that between 450,000 and one million jobs will be lost as a result.
In theory, the minimum wage would boost overall purchasing power, going some way to address the international criticism. But Hans-Werner Sinn, head of the IFO Institute for Economic Research in Munich, argues that it would merely push up the price of German goods and make them less competitive, without leading to a significant increase in consumption of imports. “There will be a bitter sobering up,” he warns.
For their part, advocates of the minimum wage argue that similarly dire gloom-and-doom scenario predicted in Britain back in 1998, when the government of Tony Blair introduced one, have failed to materialize. The British minimum wage is the equivalent of $10 per hour, below the planned German level. However, the British one is scaled so that apprentices and those under 21 receive substantially lower amounts.
With 12% of workers in the west and 25% of workers in the East currently making less than 8.50 euro/hour it’s going to be very interesting to see what impact this could have on local economies. Especially those in the east filled with low-wage “mini-jobs”. This could be a pretty exciting experiment to watch!
Common wisdom can be depressing
Still, it’s hard to see how this will be a permanent change. At least not without some sort of EU mandate. As Hans-Werner Sinn reminds us, Germany’s establishment tends to follow  a distinct Ordoliberal market-worshipping form of utopianism . The inability to set really low wages is an unacceptable distortion of the market according to common wisdom :
‘Five Wise Men’ warn Germany not to relax
AFP | 13 Nov 2013, 10:47
Germany must not ease up or back track on economic reforms, the government’s panel of economic advisors said on Wednesday as the European Commission placed the country under scrutiny for its large trade surplus.
In their annual report presented to Chancellor Angela Merkel, the German Council of Economic Experts, or so-called “Five Wise Men”, warned that Europe’s biggest economy must not rest on its laurels.
Their report comes against a background of some criticism from abroad that Germany is too successful in building up a huge trade surplus and should do more to stimulate consumption at home and so draw in imports, notably from the rest of Europe.
“The present economic situation and Germany’s healthy position compared to the euro area’s crisis countries seem to have obstructed many politicians’ view of the major future challenges,” the report said.
Following the general election on September 22nd, Merkel’s conservative CDU and CSU parties have been holding talks on a possible “grand coalition” with the Social Democrat SPD.
Among a range of different measures under discussion are possible exemptions to the new retirement age of 67, minimum wages and tax increases.
“Future challenges will be far more difficult to overcome if the Agenda 2010 reforms become diluted or reversed in some cases,” the experts warned.
“The same holds for measures which hurt growth and job creation, such as minimum wages and tax increases.”
In the eurozone’s long and debilitating crisis, Germany has fared much better than its European neighbours thanks to deep and painful structural measures, known as Agenda 2010, initiated by the previous SPD administration.
Merkel has consistently argued that other countries should follow Germany’s example and get their economies in order.
But the panel believed that Germany is still facing considerable challenges of its own.
“The German government should not give the impression that it expects – or even demands — painful adjustment processes from other countries, but shies away from unpopular measures for Germany,” the report said.
Notice that, according to the highly influential  Five “Wise ” Men, the “major future challenges” for Germany all seem to only be surmountable with ongoing austerity and a refusal to let up on the “painful adjustments” and “deep and painful structural measures” of Germany’s “Agenda 2010” austerity policies. It’s a reminder that the advocates of austerity policies might hint of them being just temporary measures but they aren’t actually meant to be temporary . Little known fact: The race to the bottom has no finish line.
The European Commission on Wednesday also placed Germany under scrutiny for its international trade surplus, seen as an obstacle to recovery across the rest Europe.
“The issue is whether Germany ... could do more to help rebalance the European economy,” Commission President Jose Manuel Barroso said after placing 15 other countries under scrutiny for failing to meet EU economic targets.
Barroso was speaking as the Commission also ordered “decisive policy action” from deficit-struggler France, Italy and Hungary.
Between now and May, the Commission using new powers is to scrutinize the economic programmes of the 16 countries to ensure that they are in line with overall coherent economic management of the eurozone and European Union economies.
The head of the EU executive said the focus also had to include countries with surpluses considered excessive, after years of concentrated efforts to organize bailouts and drive down public deficits.
“This is not about the EU running economies in place of national governments,” Barroso said. It is about “ensuring that what is good for individual states is good also for the EU,” he stressed, opening a new phase of what he called “bolder” cross-border economic policy-making.
“Liberalising” Germany the service sector: the obvious solution?
As the above article points out at the end, the decision of the “Five Wise Men” to oppose a German minimum wage as part of the CDU’s coalition-building compromise is taking place right when Germany has come under investigation by the European Commission over whether or not Germany’s extremely high current account surplus (its high savings/export-driven economy) is harming the European economy by fostering endemic destabilizing trade imbalances  that force deflation and austerity as the only remaining option for rebalanced eurozone members .
The basic solutions are either for the ailing Southern European economies to export more to Germany or for them to continue down the path of “internal devaluation”. The first option is the desirable choice if one wants to avoid a “lost generation”. The second option is the one to pursue when when one believes that a generation must be lost in order to make up for past sins . So what does European Commissioner Jose Manuel Barroso have in mind to stimulate Germany domestic demand of their neighbor’s services? More the former or something closer to the latter? Considering Mr. Barroso’s recent history with austerity policies  one might fear he’s leaning towards the latter. Especially since his plans for Germany’s rebalancing with the rest of Europe appear to center around “liberalizing” Germany’s service sector :
Last updated: November 13, 2013 1:08 pm
Brussels launches inquiry into Germany’s current account surplus
By Peter Spiegel in Brussels and Stefan Wagstyl in Berlin
José Manuel Barroso has launched an inquiry into whether Germany’s large current account surplus is harming the European economy, drawing Brussels into a heated debate over Berlin’s role in global economic health.
The European Commission president took pains to emphasise on Wednesday that the commission’s “in-depth review”, was part of its annual examination of eurozone economies and was not intended to criticise the competitiveness of German industry or its broader economy.
But he said there were parts of the German economy, particularly the service sector, that should be liberalised, and other EU officials called on Berlin to increase infrastructure investment to stimulate demand.
“We would like to have more Germanys in Europe,” Mr Barroso said. “Our problem could never be German competitiveness but whether Germany, the EU’s economic powerhouse, could do more to help the rebalancing of the EU economy.”
In Berlin, there was cross-party rejection of Brussels’ concerns. Hermann Gröhe, secretary-general of Chancellor Angela Merkel’s Christian Democrats, said exports were “a cornerstone of our prosperity”. Alexander Dobrindt, head of the CDU’s Bavarian sister party, said: “You cannot strengthen Europe by weakening Germany.”
Social Democratic and Green party leaders were similarly critical and Jens Weidmann , president of the Bundesbank, said crisis-hit eurozone countries would not profit much from more expansive fiscal policy in Germany.
“The positive knock-on effects would be limited,” Mr Weidmann said, adding that the answer to Germany’s surplus could not be to lower the competitiveness of German companies.
When the term “liberalise” is used by eurocrats like Mr. Barroso , it almost always translates into “lower pay, fewer regulations, and fewer worker protections”. Is there any reason to assume that isn’t part of the planned reform package? Sure, suppressing German wages wouldn’t actually help stimulate the eurozone or increase German domestic spending, but what proposals put forward to date really have been helpful? Mario Draghi’s occasional emergency declarations from the ECB? What else?
More importantly in the long-run, is this focus on “liberising” Germany’s service sector a sign that the European Commission and Berlin are going to use the need for changes to the German economy as an excuse to being imposing more “structural reforms” (wage suppression and union-busting) in Germany now too? The minimum wage might be rising, at least temporarily, but they could fall for better paid workers. Is Germany’s own “internal devaluation” going to be solution to the problem? Because what’s going to happen when Germany liberalizes its service sector and the benefits to the rest of the EU don’t materialize? Or it’s helpful, but to the countries that need it most. What then? Well, they can always “liberalise” the German service sector even more. That’s how the EU works, right? Just keep applying liberisation and/or austerity policies until some yet-to-be determined state of in harmonized market nirvana is reach, right ? Or maybe a whole bunch of EU countries could all liberalise their service sectors at the same time to create some sort of new harmonized market synergy that will boost exports from the P.I.I.G.S.?
These are the kinds of questions that raise a larger question regarding the future of the EU’s people: How long can the current “rich country/notably poorer country” paradigm continue in the EU while market integration — like service sector liberalisation and integration — is just a built in assumption going forward? Isn’t all the “internal devaluation” of the P.I.I.G.S.‘s economies going to start bleeding right back into the wealthier EU members now that these economies are in an unstoppable march towards a single market? The EU right-wing has dreamed  of turning Europe in to one giant permanently “competitive” zone  for years  so some sort of German “internal devaluation” as part of the EU’s rebalancing act shouldn’t be considered an impossibility. Especially in the medium-term. As the “Five Wise Men” warned us above, Germany’s success in overcoming its long-term challenges hinges on its ability to maintain its self-impose austerity policies. When that’s the long-term prognostication and somewhere between 1/8 and 1/4 of workers are already earning less than the proposed new minimum wage of 8.50 euro/hour  austerity is a permanent policy. Policies that buttress and further the existing wage suppression and general “liberalisation” of the economy are just a matter of time :
Low wages, the flip-side to Germany’s economic miracle
2:12 pm | Sunday, September 15th, 2013
BERLIN – Chancellor Angela Merkel often boasts during the campaign for September 22 elections that Germany has one of Europe’s lowest jobless rates – at around 6.8 percent. But it comes at a price.
As many as three million people in Europe’s top economy earn less than six euros ($7.90) per hour, meaning Germany has one of the biggest shares of low wages in Europe, a fact that Merkel’s critics have jumped on in the campaign.
“We’ve become a country of low wages,” sighs charity worker Renate Stark, who everyday confronts the struggle of workers paid too little to make ends meet, despite Germany’s booming economy.
From pizza deliverers earning an hourly six euros, to young journalists on less than 750 euros a month, the 55-year old social assistant for the Catholic Caritas organization in Berlin can reel off many such examples.
Like hundreds of others, Stark said, he mostly scrapes by thanks to certain welfare benefits, but when that’s not enough, “when the washing machine breaks down or an electricity bill arrives unexpectedly,” he turns to charities.
“I experience it here daily,” she told AFP. “I began this job 21 years ago and it wasn’t like that. The situation has become really serious in the past five or six years. It’s very clear.”
To be sure, many of those employed by Germany’s mighty industrial giants, for example in the automobile sector, enjoy enviable conditions. But unlike most of its European partners, Germany has no national minimum wage.
According to figures compiled by the IAQ Institute for Work, Skills and Training, more than one in five employees, or nearly seven million people, earned less than 8.50 euros per hour in 2011.
By comparison, the minimum wage in France is just under 9.50 euros per hour.
Furthermore, the boom in low-wage jobs has been accompanied by a corresponding rise in “precarious” work, such as part-time or temporary work.
There are also so-called “mini-jobs” where employees are paid a maximum of 450 euros a month and are exempt from paying social or welfare contributions.
Nearly eight million people were in such low-pay or mini-job forms of employment in 2012, almost twice as many as 20 years ago, according to data by the federal statistics office Destatis.
“Germany is the EU country where the proportion of low-wage jobs is highest behind Hungary and the United Kingdom,” said the OECD’s German expert, Andreas Kappeler, pointing to a 2010 study.
“Between 1985 and 2008, the wage gap between high and low pay has widened in Germany much faster than in the other OECD countries,” he said.
Women and all Germans in the much poorer have been the most affected by rising impoverishment since sweeping reforms were pushed through under the former Social Democrat (SPD) chancellor, Gerhard Schroeder, between 2003 and 2005.
Steinbrueck has promised to introduce a general minimum wage of 8.50 euros as one of his first moves if he is elected chancellor.
For her part, Merkel has said she wants to compel unions and employers to agree minimum wage deals by sector and region.
The process has already begun. Giant service sector union Verdi, for example, recently negotiated a minimum wage of 8.50 euros for hairdressers by 2015, the thirteenth such sector-wide agreement.
While Merkel occasionally denounces some “unacceptable” salaries, she has rejected a nationwide minimum wage which, she sees as the root of Europe’s high levels of unemployment.
Keep in mind that if Angela Merkel truly views nationwide minimum wage laws as the root of Europe’s high levels of unemployment (and there’s no reason to assume she doesn’t) then really really low wages for lots of Europeans is the plan. The existence of a minimum wage that helps to drag people out of poverty wouldn’t be a big deal if leaders weren’t planning on having a large number of people make very little money. And if large number of Europeans working at or near the minimum wage is part of the plan the Berlin and Frankfurt have in mind, that means Europe as a whole is going to turn wage deflation into one of its long-term global exports. It was a fear of “a deflationary bias for the euro area, as well as for the world economy”  that prompted the US Treasury and IMF to criticize Germany’s policy-makers. Those fears expressed by the US Treasury and the IMF are frighteningly appropriate if ideas like liberalising the service-sector are the kinds of stimulative policies we can expect from the EU’s leaders going forward.
Say hellow to EU-wide deflation: “Europe should copy, not criticize surplus”
Still, the fact that Angela Merkel is openly telling the CDU that its going to have to accept a nation-wide minimum wage is a potentially great turn of events. Not only is it potentially great news in the short-run as a means of stoking real German domestic demand and imports but also in the long-run. As former Bundesbank chief Alex Weber recently argued, the best way for Germany to help lift its neighbors out of the eurozone crisis isn’t for Germany to make changes that increase domestic imports of their eurozone neighbor’s products. No, the best policy is for those neighbors to adopt Germany’s policies...plus more deflation in ‘periphery’ :
German business: Europe should copy, not criticize surplus
Published: Tuesday, 12 Nov 2013 | 12:47 AM ET
By: Reported by Carolin Roth, written by Catherine Boyle
Axel Weber, chairman of Swiss bank UBS and former head of Germany’s central bank, has told CNBC that Germany’s surplus is not a policy problem and any international criticism of the country’s economic policy was unwarranted.
Weber joined the German voices defending the country’s economic policy in the face of international criticism. The European Commission, the 28-country European Union’s executive arm, is set to scrutinize the country’s current account surplus and whether it is negatively affecting the rest of the region.
“Studying why Germany is so successful internationally is always warranted,” Weber said. “There are a lot of lessons that many countries in Europe, particularly in the periphery, can learn from that.”
“To look at is a policy problem is in my view unwarranted...There is very little that Germany does to manipulate any of that success,” Weber added.
Germany has faced criticism from elsewhere in Europe and even the U.S. Treasury over its dependence on exports. Last week, it emerged that its foreign trade balance — the amount by which exports outstrip imports — hit a record high in September.
Critics argue that this means that Germany should be encouraging its people to spend more on foreign imports and help stimulate growth in the rest of Europe.
“A rise in domestic demand in Germany should help to reduce upward pressure on the euro exchange rate, easing access to global markets for exporters in the periphery,” Olli Rehn, EU economic and monetary affairs commissioner, argued in a blog post Monday.
Joaquin Almunia, the EU competition commissioner, told CNBC on Tuesday that at its weekly competition review meeting on Wednesday, the commission would be looking at Germany’s trade surplus.
“We need to take stock, we need to analyse the reasons why this surplus is above the threshold and what are the consequences, and what are the remedies if the consequences are negative. Tomorrow, we’ll just take stock [of the situation] we won’t issue recommendations,” he said.
“I’m not talking about punishment, I’m talking about analyzing a situation — the size of a current accounts surplus and what this means –that the savings rate is much higher than the investment rate in a country and this deserves a careful analysis.”
However, the very fact that the European Commission was investigating Germany’s economy drew criticism and disbelief from the country’s CEOs.
“It’s like you get punished if you get good grades,” Kaspar Rorsted, chief executive of consumer goods company Henkel, told CNBC.
“Europe’s biggest competitor is not within Europe, it’s outside.”
“The German economy definitely still depends on strong exports,” Frank Appel, chief executive of Deutsche Post DHL, told CNBC.
“Europe has been in recession for six quarters. Coming out of a recession happens in a very different way (for core and periphery). It’s difficult to come up with a single monetary policy,” Weber said.
“Prices and wages have to come down in the periphery.”
Turning to the recovery from the five-year global financial crisis, Weber added that the “normalization” of the global economy is continuing but risks remained. “We are in a phase of normalization. The road ahead is long, there is positive momentum but there are risks,” Weber told CNBC Tuesday.
Yes, the attitude amongst German business elites is apparently that “the road ahead is long”, and that road appears to involve prices and wages coming down in the periphery. Coming down more than they already have. It’s all part of the process of “normalization”. The EU’s road to New Normalcy is a long, crappy road. Especially when everybody’s economy has to simultaneously be based on high exports and low domestic consumption :
Future bleak for those on eurozone periphery
Saturday, November 16, 2013
The eurozone is at an inflection point. The crisis may have abated compared with the daily whirlwind that convulsed both markets and governments up to the middle of last year.
COMMENT: John Walsh
A calmness of sorts was restored in July 2012 when ECB chief Mario Draghi pledged to do “whatever it takes to save the euro”.
Right now the only thing keeping the eurozone together is the ECB. But the resolve shown by Mr Draghi is not going down well in Berlin. A narrative has taken hold in the eurozone’s largest economy that divides the region into the virtuous and the sinners.
In the virtuous corner are the Germans and a few northern European states. From this perspective, the cause of the crisis is a lack of competitiveness in southern European countries. These countries must restore competitiveness through internal devaluation. And only when these countries become more like Germany, can the eurozone grow and prosper.
There are a number of problems with this narrative, not least is that internal devaluation means slashing and burning wages, which further depresses consumption and causes a nosedive in living conditions and general social cohesion.
A less Berlincentric view of the crisis would show that the causes are much more complex and the culpability is more widespread.
The eurozone is a monetary union. The German economic model is based on exports and low domestic consumption. During the first decade of the single currency, recycled German savings made their way to the periphery which fuelled a massive credit bubble. This bubble burst with disastrous consequences in 2008.
The German economy is running a current account surplus of 6%. Yet the main political party, the CDU, and most prominent German economists, are hostile to the idea that this has any damaging consequences for other eurozone members.
Furthermore, the country has done very little to liberalise its services sector — a move that would greatly boost growth across the region. There has also been a chronic shortage of public and private investment in Germany’s infrastructure, which, if addressed, would do wonders for the eurozone. But instead, apparently, everybody should follow the German lead.
But if all eurozone states are busy saving and all wealth creation is set to come from exports, where exactly are the markets that will soak up eurozone exports? Surely, such a ‘beggar my neighbour’ policy would prompt a trade war.
Ms Merkel’s popularity at home is based on unyielding commitment to protect German taxpayers at all costs. Under no circumstances will there be any transfer union or a banking union that enabled the recapitalisation of banks using public funds, even though any economic textbook will say it is impossible to have a monetary union without some sort of fiscal union.
Unless there is a pauline conversion by the new government in Berlin when it takes office next month, it will proceed with the Germanification of the eurozone. It is likely just enough will be done to keep the single currency together. But for those on the periphery, the future will be bleak with a possible debt deflationary spiral looming large.
The preceding essay raises a lot of the critical questions that need to be asked right now in EU policy-making circles. And it’s entirely understandable that the author is calling for Germany to liberalise its services sector and allow the rest of the EU to compete in those markets. If Germany isn’t interested in buying the goods of its EU neighbors the services are going to be the only thing left to trade. There is the remaining question, though: How can Germany avoid falling into its own deflationary spiral when all those service jobs open up to competition with the nations that just saw their wages gutted by austerity? There’s a big difference between Germany stimulating imports from the EU by spending some of its record high savings on domestic investments and new infracture vs Germany stoking EU imports by opening up its service sector to EU competition. Both of these scenarios will potentially help out Germany’s EU neighbors and add some much needed EU inflationary pressures. But only one of those scenarios has the potential to unleash more deflation Germany.
Adding to all of this is the fact that a growing “lost generation” of European youth are moving from their broken economies to Germany in search of jobs . It’s a predictable consequence of the EU’s austerity policies that are predicated on destroying economies to achieve “internal devaluation” and become more “export-friendly” like Germany. Thus far the primary growth in exports has been in deflation and unemployed youth and Germany’s low-wage economy has been the destination for many of those youth exports. And there’s no indication  this dynamic is going to change any time soon. Because all indications are that the “internal devaluation” of the P.I.I.G.S. is a deliberate, conscious policy. So more “internal devaluation” is what’s on the agenda and that translates into more exported youths traveling to Germany and rest of the remaining non-ailing eurozone. It’s great when a young person leaves home to experience life in a new country but it’s a lot less great when they’re forced to do so due to appallingly high youth unemployment rates.
And then say hello to global deflation.
As long the model of high trade surpluses and maximal economic “competitiveness” is the dominant policy framework for the EU, the threat of deflation and suppressed domestic demand is probably here  to stay  in the EU. And the longer the EU, and especially the eurozone, finds itself exporting deflation, the more that deflation becomes a global problem :
Is eurozone trying to become a bigger Germany?
by Vivek Kaul Nov 15, 2013
The US Department of Treasury publishes a semi-annual currency report. The latest report  released on 30 October, 2013, makes a scathing attack on Germany. “Germany has maintained a large current account surplus throughout the euro area financial crisis, and in 2012, Germany’s nominal current account surplus was larger than that of China. Germany’s anemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment. The net result has been a deflationary bias for the euro area, as well as for the world economy,” the report points out.
So what does this mean in simple English? Germany has been the export powerhouse of the world. It exports considerably more than it imports. This is the formula it has been trying to force onto other countries of the Eurozone as well. Eurozone is a term used for 17 countries which have adopted euro as their currency.
As Albert Edwards of Societe Generale writes in a report titled Prepare for the next phase of global currency war – should we blame Germany? dated 14 November, 2013, “In the run-up to the crisis they all promoted an inappropriately loose monetary policy that caused a credit and housing bubble, runaway domestic demand growth, ostensibly sound government finances and burgeoning current account deficits, all financed by a surplus nation…predominately Germany.”
Countries like Portugal, Spain, Italy, Greece, Ireland etc went on a borrowing spree, which ultimately led to a housing bubble. When the bubble burst the banking system in these countries was in a mess. They had to be bailed out by the European Central Bank(ECB). At the same time countries were forced to follow austerity measures to control government expenditure. These measures have led to an extremely high level of unemployment in these countries. As Ambrose Evans-Pritchard of The Daily Telegraph  pointed out in a recent column “unemployment is 27.8% in Greece, 26.3% in Spain, 17.3% in Cyprus, and 16.5% in Portugal.. it would be far worse had it not been for a mass exodus of EMU refugees….Greek youth unemployment is 62.9%.”
This has led to a situation where internal demand in these countries fell dramatically. A fall in internal demand has meant lower imports. And this in turn has led to exports being greater than imports, and hence a trade surplus( a situation where exports of a country are greater than its imports). The eurozone trade surplus  in August 2013 was at $9.5 billion.
Interestingly, the collapse of demand within these countries has also led to a situation where German exports within the Eurozone have fallen. “It is that actually Germany’s trade surplus within the Eurozone has collapsed to almost zero as the GIIPS (Greece, Italy, Ireland, Portugal and Spain)have plunged into depression,” writes Edwards.
This basically means that Germany is importing as much from other countries in the Eurozone as it is exporting to them, leading to a trade surplus of almost zero. But it has more than made up for this by running a higher trade surplus with other parts of the world, primarily United States and large parts of Asia.
Hence, it isn’t surprising that the United States has a problem with Germany. While Germany is exporting goods and services to the United States, it isn’t importing the same amount back from the United States or other parts of the world, for that matter. This means that businesses in the United States and other parts of the world are not exporting enough, which in turn has an impact on economic growth.
This formula of running a trade surplus by exporting more and limiting imports has worked very well for Germany. But the question is will it work for the Euro Zone as a whole? Martin Wolf of The Financial Times feels  that the strategy may not work for two reasons. “First, the eurozone is far too big to achieve export-led growth, as Germany has done; and, second, the currency is likely to appreciate still further, thereby squeezing the less competitive economies all over again.”
The euro is likely to appreciate in the days to come given that both Japan and United States are printing money big time in the hope of devaluing their currencies. Also, this formula will have political complications as well, given that, exports can only happen if someone else is importing. Every country cannot be an exporter at the same time. Someone has to import as well.
And who will that importer be? Sanjeev Sanyal of Deutsche Bank Markets Research writes in a report titled Bretton Woods III and the Global Savings Glut dated October 8, 2013 “Reinterpreted to present conditions, the next round of global economic expansion may require the US to revert to its role as the ultimate sink of global demand.”
“Reinterpreted to present conditions, the next round of global economic expansion may require the US to revert to its role as the ultimate sink of global demand.” At least according to Deutsche Bank analysts. And they’re probably correct. There is simply no way for the entire eurozone and the larger EU to persistently run net trade surpluses without the entire world running persistent reciprocal deficits with the EU. Some forms of economic reciprocity can’t be avoided . The EU’s leaders, and the leadership in Berlin especially, have made it very clear in recent pronouncement that wage suppression is a central component of their long-term vision for the eurozone and “internal devaluation” is set to be the default long-term strategy for EU nations. When one EU member falls on hard times they should not expect help in the form of increased trade surpluses from the rest of their member nations. Internal devaluation and deflation is the predetermined response.
So we should probably applaud the SPD for their insistence on a nation-wide minimum wage. This really is good news! If nothing else, a national minimum wage could help avoid the exploitation of the growing number of low-wage young EU migrant workers and put a break on the EU’s overall deflationary forces. It also might provide some real protections for the most vulnerable German workers once the service sector opens up to competition with Germany’s austerity-ravaged neighbors.
But it’s very unclear if this is a permanent change or a temporary concession. What is becoming increasingly clear is that the high-export/high-savings model that Germany has been following since the 1950’s is the plan for the entire eurozone going forward and eventually the entire EU. And that means a wage floor in Germany may not do much to prevent wages across the rest of the Germany economy from succumbing to the deflationary pressures sweeping the continent. Having Europe adopt the Germany model is a policy that can only result in trade conflicts and greater global imbalances in the long run because there aren’t very many options for avoiding long-term global wage deflation when wage deflation is central to the long term growth strategies of one of the wealthiest continents on the planet. There are ways to avoid such a global scenario, but they mostly involve finding alien civilizations to trade with. Sure, such aliens  might be out there , but after watching us mindlessly induce self-reinforcing deflationary socioeconomic death spirals the aliens might not want to play our  silly games . Solutions that might actually solve the problem of global wage deflation  are required.