Heiner Flassbeck – Harz IV and the purpose of economics

Here is the latest post from Heiner Flassbeck, formerly of UNCTAD, and who now runs his own consultancy which focuses on macroeconomic questions.

The post explores how a decade of wage repression following the Harz IV reforms in Germany resulted in weak growth in wages relative to productivity, which in turn weakened growth in domestic demand and led to a boom in exports. The piece contains some useful charts comparing the growth in foreign and domestic demand in Germany and France.

These trends created major economic imbalances in the eurozone which in the long run proved unsustainable as they weakened economic performance in the region and were a major factor behind the global financial and eurozone crises.

Whether you are a supporter or detractor of the ‘European project’, these arguments should not be ignored. They point to the need for reforms to the structure of policymaking in the eurozone, particularly in Germany, it being the largest country with the largest current account surplus. Such reforms are needed in order to promote widespread prosperity and help to safeguard the future of the region. On the other hand, if this need is neglected, the disruptive breakup of the eurozone cannot be ruled out.

Flassbeck concludes as follows:

“In order to counter the centrifugal forces in Europe, Germany must lead the way by withdrawing its reforms and normalising wage developments. On the other hand, Germany would undoubtedly be hit hard economically in an exit scenario of Italy or France. It would have to reckon with its production structure, which is extremely export-oriented and which was formed in the years of monetary union, being subjected to a hard adjustment. The German recession is already showing how susceptible the country is to exogenous shocks.

The basic decision in favour of the euro can still be justified today with good economic arguments. The dominant economic theory, however, has ignored these arguments from the outset and politically disavowed them. Built on monetarist ideas in the European Central Bank and crude ideas about competition between nations in the largest member state, the monetary union could not function. All those who want to save Europe as a political idea must now realise that this can only be achieved with a different economic theory and a different economic policy that follows from it. Only if the participation of all members of society in economic progress is guaranteed under all circumstances and the competition of nations is abandoned can the idea of a united Europe be saved.”

A Sputtering Car Goes into Reverse: The German Recession and its Consequences — flassbeck economics international

Heiner Flassbeck and Patrick Kaczmarczyk write that amidst global political and economic fragility, the downturn in the Germany economy adds to the uncertainty in a world that, as Paul Krugman put it, has a “Germany problem”. It not only raises questions and doubts over the future of the largest European economy but, …More …

via A Sputtering Car Goes into Reverse: The German Recession and its Consequences — flassbeck economics international

Inequality, saving and growth: Germany’s role in global rebalancing

Coat_of_arms_of_Germany.svgThe IMF recently published its Economic Outlook for Germany. The report itself is quite long but a brief description of the key points can be found here. I have written before on the problems caused by Germany’s supposedly ‘prudent’ saving behaviour and export prowess, and the IMF covers this issue quite well, although as a report focused on one country, it does not consider the global implications. Here I want to focus on one aspect of the report: the financial imbalances of Germany’s economy and their relationship to both inequality and future growth prospects, both domestically and in the rest of the world.

In macroeconomics, one can consider the financial balances (net borrowing or net lending) of the three main sectors in the economy as a whole: the private sector (firms and households together), the public sector (government) and the foreign sector (the rest of the world). Together these balances can be used to analyse the total flows of expenditure and income between the three sectors, both within that economy and between that economy and the rest of the world.

If a sector runs a financial surplus over a particular period, its income for that period will exceed its expenditure and it will either be accumulating financial assets from another sector or paying down debt owed to another sector. For example, if the government runs a surplus, then revenue from taxation will exceed public spending and it will be able to pay down government debt held by the private sector, either domestically or abroad. Continue reading

Interview with Costas Lapavitsas: Strategies for the renaissance of the left in Europe — Radical Political Economy

Costas Lapavitsas, a Professor of economics at SOAS, and briefly a Greek MP in the Syriza government, discusses the causes and evolution of the eurozone crisis, and potential strategies for the left in Europe. While I am sympathetic to his explanation of the crisis, his solution, especially for Greece, are for a new leftist nationalism in opposition to the EU. Perhaps in the absence of EU and eurozone reform this would be desirable, but it remains controversial.

The interview is at the link below, via the Radical Political Economy website.

The following interview, conducted by Darko Vujica was originally published by prometej.ba on June 10th 2017.

via Interview with Costas Lapavitsas: Strategies for the renaissance of the left in Europe — Radical Political Economy

Germany’s anti-Keynesianism has brought Europe to its knees

eurozoneThis paper by Jorg Bibow has a useful take on how an ideology of anti-Keynesianism among German policymakers and its economic outcomes as a popular mythology result from a misreading of economic history. This faulty economic analysis has arguably played a major role in the eurozone crisis, and recent improvements in the eurozone economy are at the expense of the rest of the world. This is a form of ‘beggar-thy-neighbour’ policy, as a weak euro is stimulating demand for eurozone exports from its external trading partners, while domestic demand in the region remains weak. The eurozone economy is therefore improving by making the zone as a whole more like Germany in recent history, which has ‘succeeded’ via a dependence on export-led growth. Continue reading

Germany’s budget surplus: how do they do it?


The German Bundestag. Change is needed on all sides involved in the current crisis, not least in Germany.

The German government’s ‘record’ post-unification budget surplus of nearly 24bn euros was in the news this week. As a percentage of GDP it is a mere 0.8%, but compared to the UK’s deficit of just under 4%, they seem to be doing relatively well, at least in terms of the desire expressed by many politicians for governments to ‘live within their means’. And this surplus does not seem to have come at the expense of economic growth. The German economy grew by 1.9% in 2016, the fastest in the G7 group of the largest economies in the world.

So how is this possible? Quite simply, it is down to the competitiveness of German exporters, achieved at the expense of ordinary German workers over the last decade or so.

Firstly, the deregulation of the labour market put downward pressure on wages at the bottom of the scale, so that Germany now has record numbers of low-wage, insecure jobs. Continue reading