Posted by: Dirk | November 9, 2011

How Germany did not profit from the euro

Often in articles on the euro zone crisis I read things like this (written by Michael Pettis):

In the end this is Germany’s crisis to resolve, not China’s.  Germany has benefitted tremendously from the euro.  Nearly all of its growth in the past decade can be explained by its rising trade surplus which, given monetary policy driven almost exclusively by the needs of slow-growing and consumption-repressed Germany, came at the expense of the rest of Europe.

I think this is basically right, but on the other hand misleading. Let me point out two things. First, I want to bring up the German GDP growth in the past decade.

This does not look like Germany has benefitted a lot from the euro. Average growth is 0.8% – wow! Of euro zone members, only Italy did worse in the naughties. Growth in the 1990s had been averaging significantly over 1%, so even for Germany this is weak growth. A look at real wages taken from an article of the SPIEGEL reveals the changes of real wages for the de

average real gross income per month per dezile in euros
income of all persons in dependent employment
2000 2005 2010 relative change 2000-2010
(in percent)
absolute change
(in euros)
1. Zehntel 320 289 259 -19,1 -61
2. Zehntel 798 636 614 -23,1 -184
3. Zehntel 1290 1120 1048 -18,8 -242
4. Zehntel 1658 1520 1440 -13,1 -218
5. Zehntel 1958 1902 1798 -8,2 -160
6. Zehntel 2253 2245 2162 -4,0 -91
7. Zehntel 2554 2573 2485 -2,7 -69
8. Zehntel 2865 2967 2845 -0,7 -20
9. Zehntel 3434 3543 3440 0,2 6
10. Zehntel 5368 5340 5481 2,1 113
Average 2229 2201 2136 -4,2 -93
Median 2096 2087 1941 -7,4 -155
source: SOEP v27. Abhängig Beschäftigte in Privathaushalten.
in prices of 2005.

Although this is in prices of 2005, you can see that changes have varied. The richest ten percent saw their incomes rise by 2.1%, while the poorest ten percent saw their income fall by 19.1%. The table reveals further that except for the richest 10% of Germans, the years 2000-2009 was a period of stagnant or – more likely – sinking real wages. That also explains Germany’s weak domestic demand.

Therefore, I agree with Michael Pettis that Germany has to adjust. However, it is not as easy as some may think. Germany did not have high growth rates after the euro was introduced in 1999, in fact 80% of the population saw real wages falling. Now the population would be shocked to find out that these were actually the good times, and now that we are in bad times the burden would fall on them.

This reminds me of Ben Bernanke talking about how the US has benefitted from trade with China (speech from December 2006):

China’s development and its opening up to the global economy have also benefited the United States in many ways.

That ‘depends on who your friends are’. Trade integration generates winners and losers, as we know from neo-classical trade theory. The Heckscher-Ohlin model tells us that labour-scarce and capital-abundant Germany should expect lower wages and higher interest rates from more economic integration.

The way things are turning, out lower wages have materialized, but higher interest rates came hand in hand with higher default risk. The euro zone has been a failure so far, and if it is not reformed fundamentally it is doomed.


  1. Data that shows economic slowdown after introduction of the Euro does by no means support your argument. Germany could have done a lot worse without the Euro.

    • My point was that it is hard to sell the last ten years as a successfull economic policy when a) the average growth rate was about 1% and b) people deriving income from work (the majority) saw their real wages decline. Against the “could have” argument nobody can argue, because their is no alternative reality where we can explore some of the alternative policies. More consumption from higher real wages, deficit spending, perhaps looser finance by banks … you can repair balance sheets by other things than increasing net exports. How they would have compared to the real past? Nobody can say. Therefore, I agree that Germany could have done a lot worse without the euro, but I would add that Germany could have done much better with the euro – if it had followed a different economic policy.

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