The fundamental problem in the eurozone is not the Greek debt crisis. It’s not the undercapitalization of Spanish banks. It’s not the weakness of the Dutch and Italian governments or the possibility that Irish voters may once again reject a European treaty. It’s not even the threat that economic slowdowns in China, India, and the United States might push Europe back into recession.
The fundamental problem in the eurozone is low German wages.
National collective bargaining agreements covering Germany’s major industries have delivered “stable” — that is, stagnant — wages since 1999. By some accounts German wages have been stagnant since German reunification in 1990.
In the United States government and corporations combined to bust America’s unions. In Germany, the unions have cooperated with government and corporations to stifle wage growth. The result in both countries has been the same: long-term stagnation in living standards.
Of course, US wages have been stagnant for much longer than Germany’s. American workers haven’t had a raise since 1973. The pay for some jobs has gone up and the pay for other jobs has gone down, but overall pay levels in America today are actually below 1973 levels (adjusted for inflation).
In Germany as in America the economy has grown over the decades. The problem isn’t growth. The problem is that all the growth has been fed into increased profits for investors instead of increased pay for workers.
Why is this a problem for the eurozone? It’s a problem because low German wages put downward pressure on wages everywhere else in the eurozone. German workers are famously productive. If productive workers don’t get a raise, how can anyone else get a raise?
Some workers will always be more productive than others. In a well-functioning economy, workers that are twice as productive as other workers might make twice as much money as other workers. Over time as everyone’s productivity increases, everyone’s wages increase.
German workers, though, have raised their productivity dramatically over the past ten or twenty years with no corresponding increase in wages. Wages in other eurozone countries, however, continued to rise along with their economies. When German and Greek wages were denominated in Deutschemarks and Drachmas, that wasn’t so much of a problem. Now that both are denominated in euros, changing wage differentials are much more of a problem.
The European Union, European Central Bank, and European governments are using austerity policies to drive down wages in countries like Greece and Spain to bring them in line with the productivity differences between German workers and Greek and Spanish workers. That’s one way to restore balance.
A better way to restore balance would be to drive up wages in Germany. The austerity strategy attempts to restore macroeconomic balance by bringing profit rates in Greece and Spain up to German profit rates. A people-focused strategy would bring profit rates in Germany down to Greek and Spanish levels.
People before profits? Not in today’s Europe. But that’s the fundamental problem. European economies are going to grow either way. The question is: will it be pro-people growth or pro-profit growth? Will it be the plutonomy reaping the benefits, or the realonomy? Sadly, I think we all know the answer to that one. We’ve been living it in America for almost forty years now. Profits before people.