Germany must be forced out of the Euro Monetary Union.

[volpunter]

And of course all the suffering because of a Germany that abuses a weak Euro. You forgot to mention that, something you keep on repeating day in day out.

Unit Labor Costs in EMU - Brown Brothers Harriman

The focus on the European periphery is in terms of the debt overhang. Many observers see excessive lending by banks and the sovereign debt over-hang as the main cause of European woes.

Yet in some ways, these problems reflect a deeper cause: the lack of competitiveness. One of the key measures of competitiveness is unit labor costs. It is a function of wages, benefits and productivity.

Prior to monetary union, many countries in Europe would, from time-to-time, alter their central rate in the Exchange Rate Mechanism in an attempt to boost competitiveness. Rather than constant minute prices changes, as under floating exchange rates, Europe had opted for a step function. During periods of stasis, the periphery, but France as well, would lose competitiveness, especially against Germany. A lower mid-point of the ERM band would be negotiated, and the process would continue.

Monetary union blocks that path. The loss of competitiveness is masked by the accumulation of debt. The end of the global credit cycle in 2007-2008 warned of the limits of such a strategy, but many European officials were caught up in the schadenfreude over the US sub-prime mess to appreciate the storm headed its way.

The risk of lending to some home buyers in the US was mispriced. In Europe, the risk of lending to some countries was mispriced. Spain's 10-year bond traded briefly through Germany. Greece sold 10-year bonds in November 2009 around 200 bp on top of Germany.

This chart shows unit labor costs from a number of EMU members. It is drawn from Eurostat data was recently posted in The Telegraph. There are several observations to be shared. First, as the debt levels were rising in the early years of monetary union, the periphery was losing competitiveness as measured by the unit labor costs. Second, German unit labor costs trended lower from 2000 through the start of the global financial crisis. It is this divergence that became particularly problematic. The path to currency devaluation was blocked.

This forced an internal devaluation. It could have occurred through structural reforms that lifted productivity. However, ultimately the more painful path of lower wages and pensions was chosen instead. There is nothing in the Maastricht Treaty that established the monetary union forced this course. It was the failure of leadership more than the lack of an optimal currency zone that is the root cause.

Still progress in lowering unit labor costs has been seen. The adjustment is taking place at variable speeds. Of the countries included in the graph, Portugal's unit labor costs have converged the most with Germany. Germany's unit labor costs have stopped falling. They have risen gradually since 2008. Unit labor costs in Greece and Spain have adjusted, but more is needed to restore competitiveness. Improvement in Ireland has stalled. Italy is the outlier as it has hardly shown any improvement.

 

[Tsing Tao]

And of course all the suffering because of a Germany that abuses a weak Euro. You forgot to mention that, something you keep on repeating day in day out.

I keep repeating that "day in and day out"? Can you link to the last 7 days of posts made by me that say Germany abuses a weak Euro and forces other nations to suffer? 5 Days?

 

[Tsing Tao]

You have confused what Germany did after WWI , what Argentina did, and what Zimbabwe did with the alternatives being suggested for Greece. You may not understand the difference between real printing and expanding a money supply via bond purchases by a central bank -- the latter is often referred to as "printing" but it is technically not. There is a very big difference..

Bernanke Admits To Congress: We Are Printing Money, Just 'Not Literally'

Yeah, Ben. No one actually thought you were out there on the presses. Semantics are a Central Banker's best friend.

 

[volpunter]

At least 20 times on the over 100 pages in your Greek Letter to German Citizen thread.

I keep repeating that "day in and day out"? Can you link to the last 7 days of posts made by me that say Germany abuses a weak Euro and forces other nations to suffer? 5 Days?

 

[Tsing Tao]

At least 20 times on the over 100 pages in your Greek Letter to German Citizen thread.

Ah, so you don't have the links where every day I've been saying this. Do you have a link somewhere that I said Germans are responsible for the suffering of Greeks? How about one where I said all of the suffering in Greece is because Germans abuse the weak Euro? Surely, if I supposedly said this 20 times, you can show a few instances of it, right?

Misleading hyperbole noted.

 

[volpunter]

yes, all in your little Greek letter to Germans thread.

Ah, so you don't have the links where every day I've been saying this. Do you have a link somewhere that I said Germans are responsible for the suffering of Greeks? How about one where I said all of the suffering in Greece is because Germans abuse the weak Euro? Surely, if I supposedly said this 20 times, you can show a few instances of it, right?

Misleading hyperbole noted.

 

[Tsing Tao]

yes, all in your little Greek letter to Germans thread.

So you can't show anything specific. What. A. Surprise.

 

[piezoe]

Unit Labor Costs in EMU - Brown Brothers Harriman

The focus on the European periphery is in terms of the debt overhang. Many observers see excessive lending by banks and the sovereign debt over-hang as the main cause of European woes.

Yet in some ways, these problems reflect a deeper cause: the lack of competitiveness. One of the key measures of competitiveness is unit labor costs. It is a function of wages, benefits and productivity.

Prior to monetary union, many countries in Europe would, from time-to-time, alter their central rate in the Exchange Rate Mechanism in an attempt to boost competitiveness. Rather than constant minute prices changes, as under floating exchange rates, Europe had opted for a step function. During periods of stasis, the periphery, but France as well, would lose competitiveness, especially against Germany. A lower mid-point of the ERM band would be negotiated, and the process would continue.

Monetary union blocks that path. The loss of competitiveness is masked by the accumulation of debt. The end of the global credit cycle in 2007-2008 warned of the limits of such a strategy, but many European officials were caught up in the schadenfreude over the US sub-prime mess to appreciate the storm headed its way.

The risk of lending to some home buyers in the US was mispriced. In Europe, the risk of lending to some countries was mispriced. Spain's 10-year bond traded briefly through Germany. Greece sold 10-year bonds in November 2009 around 200 bp on top of Germany.

This chart shows unit labor costs from a number of EMU members. It is drawn from Eurostat data was recently posted in The Telegraph. There are several observations to be shared. First, as the debt levels were rising in the early years of monetary union, the periphery was losing competitiveness as measured by the unit labor costs. Second, German unit labor costs trended lower from 2000 through the start of the global financial crisis. It is this divergence that became particularly problematic. The path to currency devaluation was blocked.

This forced an internal devaluation. It could have occurred through structural reforms that lifted productivity. However, ultimately the more painful path of lower wages and pensions was chosen instead. There is nothing in the Maastricht Treaty that established the monetary union forced this course. It was the failure of leadership more than the lack of an optimal currency zone that is the root cause.

Still progress in lowering unit labor costs has been seen. The adjustment is taking place at variable speeds. Of the countries included in the graph, Portugal's unit labor costs have converged the most with Germany. Germany's unit labor costs have stopped falling. They have risen gradually since 2008. Unit labor costs in Greece and Spain have adjusted, but more is needed to restore competitiveness. Improvement in Ireland has stalled. Italy is the outlier as it has hardly shown any improvement.

Thank you Tao. It is very nice to see posted in these forums an analysis with correct facts and so well reasoned.

One of several important points made is that the small, incremental adjustments allowed in the European exchange mechanism in the interim between the Maastricht and appearance of the euro, adjustments which helped maintain competitiveness, were no longer possible once a common currency had been adopted. (see: "Monetary union blocks that path.)

It is undoubtedly true that "the loss of competitiveness is masked by the accumulation of debt." If that debt, however, is accumulated from investment aimed at increasing competitiveness, or in economic stimulus to end a recession and rescue an economy from "debt trauma," then it is good debt. If, on the other hand, as was the case in Greece, it is simply acquired to replace revenue lost to non-competitiveness and recession it is a stop-gap measure, but not an investment, and not good debt. This is the reason why, from the Keynesian point of view, the eurobond is so very much needed. The eurobond would greatly facilitate ECB operations and the raising of money at a low rate for investment in eurozone countries currently in recession .

The author correctly points out that austerity measures, e.g., lowered wages and pensions, are equivalent to internal devaluation. This is not, however, a helpful kind of devaluation. It will not boost competitiveness. It will prolong recession. It will make matters worse, not better.

 

[zdreg]

You may not understand the difference between real printing and expanding a money supply via bond purchases by a central bank -- the latter is often referred to as "printing" but it is technically not. There is a very big difference..

present piezoe with a question that requires a factual response and he is nowhere to be heard.
"what is the difference?"
it is all a camouflage to hide his true beliefs that he a soft money communist. of course, in his mind communism never existed in the soviet union because it did not fit his narrowly defined definition. that is the way he can deny that his beliefs are communist. in this case he can then deny that governments are pursuing easy money inflationary policies.

 

[piezoe]

One of the things I like best about ET is that participants are free to express their views no matter how bizarre. There is virtually no moderator censoring. It's very refreshing.