The Real Problem For the Euro

The real problem for the euro: Germany’s productivity is increasing much faster than any other Eurozone country’s.  While the world is focused on the short-term crisis, Prof. Alan Blinder makes a persuasive case that the long-term problems will be even less tractable.  In an op-ed column in the Dec. 13 Wall Street Journal, Dr. Blinder argues that Germany’s labor market reforms have been far more extensive than those of other Eurozone members.  That means German real wages will rise faster than wages in other Eurozone countries.  Under the pre-euro exchange rate system the deutschemark would have appreciated, other currencies would have depreciated and relative balance would have prevailed.  But with a single currency Germany finds itself running large current account balance surpluses with the other Eurozone countries.  Without an exchange rate adjustment mechanism, German living standards will continue to improve much faster than the other member countries.  Which, in turn, will mean ever-increasing demands for fiscal bailouts from the wealthier Germans.

Twenty years ago, Paul Krugman and Bob Mundell declared that the euro experiment would most likely not work out very well.  The basis for their forecast was Mundell’s theory of optimum currency areas.  How come economists never get credit when one of our forecasts is correct?

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.

4 Replies to “The Real Problem For the Euro”

  1. Daniel

    “That means German real wages will rise faster “.Well thats not really a big deal when you take a closer look on the development of the real wages in Germany: Real wages rised about 22% (while the low-paid sector rose by 22%!)over the last 10 years in Germany vs. over 30 % in the Eurozone!Anyway there surely is a big problem without the natural exchange rate mechanisms for some of the Euro countries,which didn´t have the same labor market reforms in the past

  2. Daniel

    Thats true 😉 But the rise in wages in Spain etc.was much higher than in Germany ,because of quiet conservative labour agreements in the last century.Good to hear from you too Professor,we should keep discussion topics in the future =)

  3. Willson kraja

    Very important consultation indeed! I mean Germany’s productivity increase faster because good labor market and other causes. If every country can follow the Germany’s process; so they also can their productivity faster. Thanks.