Posted by: Dirk | November 18, 2010

Global imbalances – caused by the free market?

At the last G20 meeting, Obama and Merkel clashed on whether Germany should increase government spending (it is about to do the opposite) and whether German exporters had an unfair advantage because of suppressed wage growth. China was also implicated in Obama’s accusations, having just overtaken Germany as the biggest exporter of the world. Ms Merkel used to defend German exports like this:

“German export successes reflect the high competitiveness and innovation strength of our companies,” she said. “Artificially reducing Germany’s competitiveness would be of no use to anyone.”

She said this in the WSJ earlier this year and still clings to this line. As an economist, however, I feel obliged to point out that this is not true. Politics have been favouring export firms with their policies for many years now. Whether Germany was ruled by the right (Christian democrats plus liberal party) or the left (Social democrats plus Green party) or the Große Koalition, most policies helped exporters and harmed workers. Workers’ real wages have stagnated for almost a decade by now (see paper here), while competitiveness of German exporters went on the rise (see graph). So, the claim that exports are up because of supply side reasons only is wrong.

And by the way, policies in Germany continue in this general direction. Faced by rising financing needs in the pension system, there were two possibilities: cutting pensions, or increasing the work age until 67. The possibility of letting firms pay more was not even discussed to my knowledge. Again, when push cames to shove, the workers pay the bill. The same happened some weeks ago with the health care reform: from now on, only workers pay more, firms do not share the burden (source). So, it’s not just innovation in German firms that leads to those net exports, it is also the result of economic policy: an artificially increased competitiveness. And by the way: reducing German exporters competitiveness by increasing wages, directly or indirectly, wouldn’t hurt workers, I suppose. Also, it wouldn’t hurt European neighbours which could then increase their exports to be able to pay down their foreign debt.

In the next days, I’ll look at the way China is increasing competitiveness of its exporting firms.


  1. […] months ago, I looked at the competitiveness of German firms and promised to write something about China as well. The topic is not a day-to-day issue but rather […]

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