dissabte, 23 d’abril de 2016

Deflation, low interest rates, and Germany

In a recent post in his blog, and from a comparison of data from France and Germany, Heiner Flassbeck pointed out who is responsible for the current deflation and the low interest rates.

And he concluded that "there is no doubt about it that it is Germany. European deflation has its origins in Germany and nowhere else". And he told that "the figures make perfectly clear that the source of European deflation is to be found in Germany. This evolution has been ongoing on since the beginning of the European Monetary Union. Clearly, it was the policy of wage moderation, which was implemented by the Red-Green coalition and heavily supported by the CDU-CSU, which made that unit labour costs in Germany did not increase once between 2002 and 2007".
We can complete this analysis with the data from other countries, but the final conclusion is always the same. Without considering UK, which is out of the euro zone, and conversely to Germany, in Spain, Italy, Portugal and Greece, the inflation has been higher than the ECB inflation target (with the exception of Greece after the implementation of the Memorandums). On the other side, the inflation evolves in the same sense of the Nominal Unit Labour Costs (with the exception of Portugal in the last years).
It is very important to notice that Germany is the only country (a part from the UK) where inflation (apart from the UK again) and nominal unit labour costs remain much lower than the inflation target of the ECB during all the period from 1999 (the moment of the implementation of the euro).

And it is true, as Flassbeck pointed out, and as we can see in the recent evolution of the nominal unit labour costs, that "it is unquestionably correct that the policy which prevailed after the outbreak of the financial crisis and which boiled down to more (and sometimes savage) wage cuts in the crisis countries, which in turn aggravated already existing deflationary trends in Europe, was pushed through by Germany and the Troika".
And we can see very well the consequences of these policies in the evolution of the asymmetries in the current account balances among countries. Whereas the external balance of Germany increased its surplus continuously from 1999, the external balances of Greece, Portugal, Spain and Italy worsened their deficits until 2008 (Italy 2010) when they began to apply policies of austerity and the internal devaluation. In France, the balance of the current account worsened continuously from 1999 although from 2013 it seems to recover. Finally in the UK it has been constantly a deficit which has worsened in the whole period.