In 1992 external devaluation might have been the better option, for Germany (3 graphs)
from Merijn Knibbe
Re-unification caused mayor economic challenges to Germany which partly were met by a policy of mild austerity – mild compared with the present slash and burn economics in southern Europe. And at this moment the German economy is doing remarkably well, even taking the slowdown of the last nine months into account (see paragraph 1). Is this success due to austerity? Or did austerity actually postpone it, as it restricted domestic demand and made Germany too dependend on exports? Indeed, German success still is to a considerable extent caused by buoyant exports to the BRIC countries (especially China) which, as they are mainly driven by technology, do not seem to be too dependend on prices. Anyway – between 1991 and 2006 the German economy did much less well than at the moment (paragraph 2). Growth was low, unemployment was high and the growth of productivity was sub-average, despite the possibilities for ‘catching up’ in East-Germany. Why wasn’t there a second “Wirtschaftswunder” in this period, caused by a fast modernization and fast growth of productivity in the “Neue Bundeslander”, despite all the massive investments in this area? I dare to propose the hypothesis that Germany should have devaluated the mark in 1992, after reunification and the “Eins zu eins Wahrung”, the 1 to 1 change of (a large amount of) East-Mark-prices into West-Mark-prices, which led to a crippling overvaluation of former East-Germany and also considering the fact that around this time German wages were around the highest of the EU (this by the way in stark contrast to the present wages in Spain or Greece). Devaluation in such a situation might at least to an extent have prevented the 15 years of (in a comparative and historical perspective) anemic growth and high unemployment after 1992.
1. The short-term: remarkable, export led ‘extensive’ growth.
Recently the German Statistisches Bundesamt published the second, detailed estimate of German growth data for the second quarter of 2012. The German economy is doing reasonably well:
* Consumption is going up, albeit slightly and mainly because employment increases
* Government expenditure is increasing, even more slightly
* Exports are up (mainly to countries outside the Eurozone)
* But investments (including stocks) are down
The increase of demand enabled growth of the service sector, while construction and industry (yes, industry) did not do too well. At the same time and mainly because of job growth in services, unemployment went down. Despite this there still are, when we look at ‘broad’ unemployment, still over 7 million people unemployed, not looking for a job anymore or involuntarily working short time. Also, during the first half of 2012 the government knew a surplus. All in all, the economic situation could be worse.
2. The long term
Things have not always been as positive. As recently as 2005 and 2006 the German economy did quite bad. And at that time it had already shown anemic growth for more than ten years, in a historical as well as a comparative perspective. I’ve made a comparison of German economic growth and unemployment compared with Dutch economic growth and unemployment since 1950. We can discern three phases:
I. An initial phase of high growth and rapidly declining unemployment: the ‘Wirtschaftswunder’ – the productive forces of the new economy were finally fully used to improve the lot of humanity. Dutch growth was quite a bit lower which to an extent can be explained by already low Dutch unemployment at the beginning of this period, German productivity however also increased very fast. The sudden market oriented reform of the price system of goods and services of Ludwig Erhard is often cited as the main cause of this extra ordinary growth. We should however not forget that in the same period the same Erhard was the main architect of the German welfare state. In my view, this social revolution was a main cause of the growth of demand that prevented Germany from sliding back towards an underconsumption situation like the Great Depression.
II. The ‘Wirtschaftswunder’ was followed by a phase of initially low unemployment and slightly lower growth: the “Berlin Wall years”. Note the comparability of developments in Germany and the Netherlands. The most remarkable aspect of this period is of course the rise of unemployment after about 1971. In the Netherlands unemployment had been below/equal to 3% for more than two decades and in Germany for about one decade when it suddenly started to increase, after the oil crisis to about 4% and after the (much more damaging) Volcker crisis even to about 10% (Volcker, president of the American Federal reserve, raised the USA interest rate to increase unemployment and therewith combat inflation. This led to a serious crisis in Europe too, despite the fact that inflation in German and the Netherlands was quite a bit lower than in the USA). Somewhat higher growth towards the end of the eighties caused employment to decline a little, though the sheer length of the “Volcker-slump” is remarkable.
III. The ‘Euro years’ (remember: the Maastricht treaty was signed in 1992). The decline of unemployment was short lived, however and in early nineties unemployment increased again, in Germany as well as in the Netherlands. After re-unification, developments in Germany and the Netherlands (which taking in already low unemployment in the Netherlands in 1950 into account had shown the same patterns for forty years…) suddenly start to differ. German growth was suddenly and consistently lower than Dutch growth for thirteen years in a stretch, despite the ‘catching up’ possibilities of the ‘Neue Bundeslandern”, former East-Germany, while unemployment was suddenly and consistently higher than in the Netherlands. In East-Germany unemployment often even reached ‘Greek’ levels.
The ultimate reason for the sudden difference is clear: the problems of re-unification. But the question is: why did it take so long for the German economy to rebound?
After re-unification Germany chose a policy of internal devaluation. This kept demand low and unemployment high, therewith incurring enormous costs on the German economy (think about the foregone production of the millions of unemployed). In a sense, this policy was successful. Around 1990, the (West-) German wage level was about the highest of the entire EU. And though average wages in German are surely not low at this moment they are at the moment, however, about as high as in many surrounding countries (though less so for wages industry wages, which still are relatively high in Germany). Fifteen years of mild austerity took care of that. But wage moderation might have come at an additional high cost: sub-par productivity growth though companies kept improving and modernizing their products after 1992, also because unlike in the USA and the UK, money was not invested in a real estate boom and finance but in technology and education. Even then, it took the better part of two decades before unemployment went down again. Might the German economy, except for some world class technology clusters, have suffered from an overvaluated rate of exchange? If so, a 5 to 10% devaluation in 1992 might have been the better solution, back in 1992. But even then (the Maastricht treaty!), the Euro seems to have had precedence over economic sound thinking.
As a german citizen interested in history and economics I would like to help with some of translating and make some statements of my own if that’s okay.
1. “Eins zu Eins” instead of “Einz zu einz”
East German industries and companies were forced into bankrupcy because of two things. (1) the 1:1 exchange rate and (2) the policy of the agency (the “Treuhand”, engl. “trust”) which was entitled to manage the privatization of all the state-owned economy . (1) caused the companies which succesfully sold manufactured goods to west germany to adjust their prices while their costs weren’t adjusted. they plunged into the red numbers. (2) consisted of a false evalutation of the enterprises capital. most of the state owned companies possessed real estates – to a large degree the standard buildings in which the employees lived near their workplace. But the “Treuhand” was told to sell as fast as possible and so it did. A lot of business crime happended back then.)
2. There is a simple typo. It’s “Statistisches Bundesamt”.
3. The official unemployment numbers are not to be trusted. The criteria have been altered around 2004 or so. And a main effect on the current situation of the german labour market was the “Agenda 2010″ which was enforced during the Schroeder-Administration. Since then there is a huge political and financial pressure on workers and unemployed. The wages are way too low compared to the productivity rate. People are forced to apply for any kind of job regardless of their qualification. If they don’t follow the orders of the job agencies, their monthly payment is cut by 25-40% where even 100% are not enough for a decent living.
That development has not been recognized enough by foreign observers. And that can be identified as a massive internal devaluation in order to boost the export industry even more. Some economists claim that this is one major reason for the crisis europe is facing now.
4. You can say that basically East German has been deliberately de-industrialized due to the effects of the reunion process. A glimps of new hope came up with the introduction of the solar panel manufacturing a few years ago. But lacking proper instruments of a protectionist character this industry is on its way down because of the competition in foreign countries.
Corrected. Thinking about this I get the idea that the Kohl/Schroder policy was more or less the opposite of the Erhard policy: distorting prices and cracking down on labour, instead of the other way around.
For this thirty page long paper I am writing as part of my BA finals I chose one text by Mueller-Armack (1948) and one by Erhard (1964) in order to find out what their theory and praxis of a “Soziale Marktwirtschaft” (engl.: social market economy) was. In the end I had kind of a check list with about 20 conditions of which Germany fulfilled only 2.
Maybe it is like with the G.O.P. and Ronald Reagan: Today he would be considered as too soft to be nominated as a presidential candidate. And for Germany Erhard and other ordoliberals from the post-war time with their ideas of an economy and how its frame conditions should be like probably were members of “Die Linke” party (engl.: The Left).
I think the problem of our time is that government policies of the past 20-30 years allowed companies and employers to take the “easy way out” by dumping wages in order to keep up the profits. The Schroeder/Merkel policy consists of a strange mixture of interventionism and laissez-faire. As I read in Nasar’s “Grand Pursuit” about Alfred Marshall for him it was unthinkable that employers and companies engage competition by fighting a war of low wages. For him innovation and rising productivity was the only way to prosperity in a market economy. But history wronged Marshall and showed us that somebody has to keep up the pressure on companies to take the “high road”. For Marshall this pressure was caused simply by other companies. Nowadays that is not enough anymore. Without things like a common minimum wage the race to the bottom continues. Regarding such a minimum wage Germany is less developed than the U.S. are.