Posts Tagged ‘germany’

How the US economy is like Luke Wilson in “Idiocracy”

10 March 2014

See for yourself. Our anemic economic performance since 2007 is . . . the best in the world?

Image

Yes, it’s still a slow recovery that has yet to restore full employment, but, except for Germany, we’ve done better than any of our counterparts in Europe that also experienced a financial crisis.

“The ordinary will be considered extraordinary.”

I was going to say something about the folly of austerity policies (spending cuts and tax increases) during an economic slump, which is true insofar as US budget policy has been only mildly contractionary while our European counterparts have embraced austerity and all but one have sick economies to show for it, but that one is Germany, which was slightly ahead of the US as of 2013:Q2 (data for 2013:Q3 and Q4 were not available for the European countries). Germany’s economy defies easy explanation. Maybe Germany should be Luke Wilson’s character and the US can be Maya Rudolph’s.

(For anyone who’s not familiar with “Idiocracy,” here’s the trailer.)

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Impossible Germany

18 August 2013

The Eurozone has had famously high unemployment rates since the euro’s inception in 1999, and for most of that time Germany has been a key sufferer, with unemployment over 8%. Since the financial crisis broke in 2008, German economic policy has been mostly associated with austerity policies, which have predictably tended to worsen Europe’s employment situation. Yet Germany’s labor market appears to have been thriving over the past five years, with an enviable unemployment rate last month of 5.4%, second-lowest in the entire 27-country Eurozone. (Relatively tiny Austria has the lowest, 4.6%.)

eurozone-country-unemployment-rates

What accounts for the German labor market miracle? I’ve been pondering this for a while now.

First, is this miracle for real? In the US, for example, the official unemployment rate has lately been falling, yet the employment-to-population ratio has barely budged, largely because fewer people are entering the labor force (i.e., getting jobs or looking for jobs). Yet Germany’s labor force participation rate and employment-to-population ratio have been increasing. Has Germany suddenly changed its definitions of who is unemployed or not in the labor force? Apparently not, and it wouldn’t matter anyway, as these numbers are the International Labor Organization definitions of unemployment, the same as the US uses. Also, this is a fairly long-term pattern, back to 2005 (coincident with, though not necessarily caused by, Angela Merkel’s term as Chancellor following the 2005 elections).

On the other hand, perhaps Germany’s official count of the employed, like the US’s, includes a lot of part-time workers who want full-time work but cannot find it because of bad economic conditions. Indeed, The Telegraph reports:

nearly one-in-five German workers is in a tax-exempt mini-job, earning €450 a month or less. A government survey a few years ago found that nearly a third of mini-jobs workers were looking for a job with longer hours but were unable to find one.

Let’s do the math. <20% * <(1/3) = employment rate of 94.6%. Subtract 6% of 94.6%, and you’ve got 88.92%, or an unemployment rate of about 11%. This is roughly similar to the US situation, where counting involuntary part-time workers as unemployed would add 6.2 points to the unemployment rate. On the other hand, Germany’s “mini-jobs” are more a matter of government policy than their US counterparts. For more, see this Wall Street Journal article on mini-jobs, in which German experts call them dead-end jobs that provide no incentive for employers to move these workers to full-time or for the workers to give up their tax and welfare benefits for full-time work. Balance it out with this other Telegraph article that argues that mini-jobs are a helpful means of providing work.

All of this is quite different from the post I expected to write. I was going to mention how the euro’s recent weakness (for the past two years, it’s been down about 10-15% from its 2009 peak) helps Germany’s net exports. It does so both in the usual way and because Germany’s currency is surely cheaper under the euro than it would be if Germany were still on the Deutschmark. Crisis countries like Greece and Italy drag down the value of the euro, while whatever the high demand for German assets as financial safe havens does to raise the price of the euro is offset by reduced demand for other euro-country assets.

I was also going to mention Germany’s sluggish population growth and difficulty in attracting immigrants, which have caused the labor force to grow slowly. It’s easier to find jobs for a trickle of new labor force entrants than for a flood of them.

Finally, I was going to mention this 2011 National Bureau of Economic Research paper by Michael C. Burda and Jennifer Hunt, which finds the “German labor market miracle” to be real and attributes it to a hiring catch-up on the part of employers who were reluctant to hire early on in the 2000s expansion, “wage moderation” (unions accepting smaller pay increases, apparently), and “working time accounts,” seemingly similar to the “flex-time accounts” proposed by Chamber of Commerce Republicans, that allow employers to avoid paying overtime if the employee work week averages out to the standard amount. Note that the paper (or at least its abstract) does not mention “mini-jobs,” which may mean that mini-jobs are nothing new in Germany and that their use has not expanded much of late (I could not find anything much on the history of mini-jobs in my Googling).

All things considered, Germany’s labor market still looks a lot better than that of the rest of the Eurozone (except German-speaking Austria). I’d like to see a German equivalent of the comprehensive “U-6” unemployment rate that the US reports every month. My guess is that it would be very high, much like that of the US, but still showing dramatic improvement since 2005. They’re doing something right over there, but it’s hard to tell just what.

Euromad

3 December 2011

The euro has always struck me as Germany’s final success at dominating Europe. What two world wars couldn’t accomplish, the Bundesbank could. By the 1990s, Germany looked like such a model of economic rectitude that eleven of its neighbors and near-neighbors (now 16, not counting principalities) were happy to formally link their currencies to Germany, their monetary policies to a European Central Bank that was a continental version of the Bundesbank, and their fiscal policies to a treaty that said deficits and debt should be under 3% and 60% of GDP (which seemed to reflect German fiscal conservatism).

Fiscal conservatism hasn’t fared well since recession began in late 2007. Even without the countercyclical tax cuts and spending increases that many governments enacted, falling GDP has caused most countries’ debt/GDP ratios to skyrocket. Even Germany’s is now over 80%. (And contrary to conventional wisdom, it’s just not true that the European economies now facing debt crises, with the exception of Greece, were running up huge deficits and debt prior to the recession; c.f. Krugman and Dean Baker.)

The news for much of this year has been of sovereign debt crises in Greece and the other “PIIGS” countries (from the “BAFFLING PIGS” mnemonic for the first 12 euro members), Portugal, Ireland, Italy, and Spain. But the most shocking economic news for me this year was the recent report that they held a German bond auction and “nobody” came. Not really nobody, but the German government was only able sell three-fifths of the “bunds” they intended to sell. To be sure, they’d have sold more if they’d been willing to accept lower bids; these bonds were supposed to pay just 2% interest, and that’s about where the yields ended up. The linked article quotes some observers who say the weak auction was due to investor concerns that Germany might be left holding the bag for PIIGS and other euro countries that can’t pay their debts. Others have said it was mostly about currency risk, i.e., the risk that the euro might massively depreciate or even crack up over the 1o-year lifetime of the bonds.

Could a euro crack-up happen? Some experts think it actually will happen, perhaps soon. Peter Boone & Simon Johnson:

‘The path of the euro zone is becoming clear. As conditions in Europe worsen, there will be fewer euro-denominated assets that investors can safely buy. Bank runs and large-scale capital flight out of Europe are likely.

‘Devaluation can help growth but the associated inflation hurts many people and the debt restructurings, if not handled properly, could be immensely disruptive. Some nations will need to leave the euro zone. There is no painless solution.

‘Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.’

At least the run on the euro is off to a slow start. The euro has had a rough November, but its decline against the dollar was only four and a half cents, or about a penny per week. The euro’s price against the dollar is still higher now than it was in most of 2005-2006.

As has been noted, euro membership has arguably gone from a privilege to a bane for these weaker countries, and possibly for all of them. Before the recession, their governments and firms could borrow cheaply on the international market, as the relatively stable euro provided insurance for the lenders, against getting repaid in devalued currency. But now euro membership takes away two key stabilization tools for them: monetary stimulus from their own central bank, and currency adjustment (a devaluation could help GDP through increased net exports).

The messy euro situation looks like the big wild card for the U.S. economy. (Here the conventional wisdom is actually correct, in my view.) Although the blow to U.S. exports from a double-dip European recession could theoretically be offset by more expansionary fiscal policy, the political prospects for additional stimulus have been dim for a long time. Things would have to get a whole lot worse here before any new stimulus could get past the Republicans in Congress, and maybe not even then.

Stabilizing or flatlining?

14 August 2009

Among the latest signs of recovery are positive GDP growth rates for Germany and France in the second quarter of this year.  The media, apparently tired of reporting bad news, are trumpeting this as sensational news, which it really isn’t.

Both of those countries saw real GDP growth of 0.3% (or about 1.2% annualized), which is better than negative, but less than half of what normal GDP growth looks like. (The average for the last 30 years is 2.9% per year.) And in a real, robust recovery the economy is supposed to grow faster than normal; it has to, to get back to its potential. If GDP in those two countries had fallen by 0.1%, they would still be considered to be in recession — should so much importance be attached to a difference of 0.4% in a three-month period?

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