In March 2007 the European Commission published a working paper entitled “Adjustment in EMU: A model-based analysis of country experiences”. I introduce it here and took a look at Spain. Now for a short summary of Germany:
1) Shocks related to the creation of the euro area explain GDP and its components as well as inflation in the first 2 to 3 years. The rise in the risk premium also explains a lower permanent consumption level and a more permanent current account surplus (of about .6 percent of GDP)
2) In order to match the model simulations with the data in recent years (since 2002) specific demand shocks must be given (especially shocks to housing investment and corporate investment in the tradeable sector plus a fiscal shock to explain weak consumption growth). These demand shocks partially explain low inflation plus an increase in the current account surplus.
3) On the supply side, TFP growth of non tradeables is important for two features of the German data, namely first a gradual recovery of German growth and second low inflation.
4) Notice, no particular shock is given to the labour market. The demand shocks, especially housing and corporate investment are sufficient to generate a decline of the employment rate in the order of magnitude as observed in the data.