There is a story that says that the key for the export success of Germany is the fall in relative wages that emerged from a more flexible labor market (the Hartz reforms of 2003-2005). As a result, unitary costs fell in Germany and made her more competitive. Other European countries opted to maintain protected labor markets which made it impossible for them to resist German’s wage depreciation. The rest of the story is well known: mounting disequilibria in current account for those that lagged behind in liberalizing the labor market, debt and crisis. But perhaps the story is not totally consistent with the empirical evidence.
First, the dynamics behind German competitiveness is not wage restraint, or at the very least this is just a small part of the story. The engine of exports is higher productivity growth as compared to her European partners. The focus of German firms do not lie on prices and wages, but on accelerating innovation and quality, approaching to (or further shifting) the international technological frontier. The driving force of competitiveness is Schumpeterian. As the authors point out: “Germany's resilience cannot be explained in terms of its (superior) international cost competitiveness, nor can one attribute the Eurozone imbalances to differences in relative unit labour costs. Germany's rebound is not due to the Hartz reforms and “effective wage suppression”. Far from it. We argue that Germany's remarkable rebound must be explained in terms of the country's superior technological performance giving rise to strong non-price competitiveness.”
The second crucial point is that the Keynesian cure is insufficient. Keynesians measures are clearly urgent and necessary, but as the authors point out, this would not be the end of the problems in Europe. The way out of the crisis will not come from solely from raising wages and effective demand in Germany. If the Greeks and other peripheral European economies do not change their patterns of production, external disequilibrium would check growth and the creation of decent jobs. As the authors conclude: “While higher German wages may help restore domestic demand growth in Germany itself, they are no substitute for a radically rethought industrial policy for the Eurozone periphery, which should replace of the broken Euro Plus Pact".
* “Crisis and recovery in the German economy: The real lessons”, Structural Change and Economic Dynamics, 2015, advanced publication at: http://www.sciencedirect.com/science/article/pii/S0954349X15000028#