Promises to Pay

Particularly on the international stage, Germany has been accused of weariness with the European project. At times, it is hard to avoid the impression that other European nations measure Germany’s enthusiasm for Europe by the extent to which we are willing to instantly shoulder the burden of various financial rescue packages.

Those harbouring such feelings toward Germany point on the one hand to low growth in German unit labour costs, which is said to be unfair to other European countries, and, on the other hand, to our high trade surpluses, which are touted as proof of how much we have benefited from the euro. We should thus be happy to show a measure of gratitude, the logic goes. Yet both of these perceptions are flawed.

The unit labour cost theory falls under the category of "lies, damned lies, and statistics". The proponents of this argument typically select somewhere around 2005 as their point of departure in order to show that manufacturing unit labour costs in Germany – in other words, the ratio of the nominal wage to labour productivity – has indeed grown at a slower rate than the European average. At first glance, this reproach might appear justified, but it does not stand up to closer inspection. Viewed from a longer term perspective, what actually happened was that during the 1990s and into the early 2000s, Germany simply corrected its earlier wage policy sins, which had been committed at a time when domestic wage costs were appreciably higher than those in the eurozone as a whole. By 2005 we had simply returned to a unit labour cost level comparable to1990. And don’t forget: we are speaking about unit labour costs, which take worker productivity into account.

The criticism levied by supporters of the labour unit cost thesis – namely, that the calculations are based on the manufacturing industries, and that for the economy as a whole, things would look quite different – represents a rearguard action. The high level of international competitiveness for which Germany is reproched finds its expression in strong exports, and Germany primarily exports manufactured goods. Thus, the unit labour cost comparison should be based on this sector.

The argument that Germany's large trade surpluses should justify an equally large willingness to pay for bailouts is of a similar pedigree. We in Germany are not entirely blameless for perpetuating this fallacy. Before Germany was replaced last year by China as the world’s largest exporter of goods, talk was all too frequent in the media of our status as "world export champion", as if we were discussing the World Cup. No question about it: an export surplus means we are exporting more goods than we import. But the other side of the coin is the balance of payment deficits run by foreign nations. When we export more than we import, this means nothing other than an extension of credit abroad. A country may have good reasons to do so – for example, in response to demographic changes – as occurs when retirement provisions take the form of capital investments, some of which go abroad and will later be repatriated. But in recent years, our extension of credit to foreigners has occasionally gone awry. In return for supplying high-quality machinery to the United States, for example, we were given scrap paper from Lehman Brothers. It would have been better if we had instead made greater domestic investment.

This raises another important interrelationship. By definition in national accounting, the current account balance represents the difference between savings and investment. If domestic savings were completely transformed into domestic investment, the balance of payments would be in equilibrium. This understanding illuminates one important downside of Germany’s trade surplus, namely, that there has been insufficient domestic investment activity in Germany. Indeed, Germany’s domestic investment rate and resultant growth path ranks toward the bottom in a comparison of European nations. Seen in this way, we are actually harming ourselves with our massive trade surplus. The notion that this surplus should provide a greater willingness to pay is thus unjustified.