Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday, 19 July 2016

German macroeconomics revisited

At the end of April George Bratsiotis and David Cobham organised a conference with the provocative title “German macro: how it's different and why that matters” which I unfortunately was not able to attend. Six of the papers presented, plus some additional papers on related themes, are published here. The papers by Peter Bofinger and Michael Burda are related to earlier work by both authors that I have discussed in earlier posts here and here.

Many of the themes in these papers have been briefly discussed in past posts. Peter Bofinger notes that the macro taught in German universities is little different from that taught elsewhere, but stresses the prevailing influence of Ordoliberalism and the ideas of Walter Eucken. Michael Burda emphasises the role of German self-interest in influencing the policy positions of German macroeconomists. As I note here, it is often difficult to distinguish between the relative importance of ideas and self interest.

This is particularly true when ideas and self interest reinforce each other. According to Bofinger, Ordoliberalism reacted to the demand problem identified by Keynes by stressing the importance of wage flexibility and sound money. Germany’s distinctive wage bargaining structure allows an unusual degree of flexibility. In the context of a fixed rate system or monetary union where other countries cannot respond in kind, this does indeed allow a way out of demand deficiency as we saw in the early years of the Euro. As a result, virtually the only country to survive to Eurozone recession largely unscathed was Germany.

I hope it does not need spelling out that this route out of demand deficiency only works by taking demand from other countries. [1] If Germany had its own currency and a floating exchange rate, any fall in domestic prices would be offset by an exchange rate appreciation. Luckily for Germany its neighbours, perhaps attracted by its ability to keep inflation low, have been eager join fixed rate systems or monetary unions where the wage cutting trick will work (see the book by Yanis Varoufakis reviewed here for example).

The only points I would add is that this unusual economic outlook is not confined to macroeconomics, and that it depends to some extent on a degree of insularity from international mainstream discussions of economic policy. It is hard to imagine a reputable UK or US research institute talking about the minimum wage and saying “minimum wages have time and again been shown to help some workers earn more at the cost of the low-skilled losing their jobs”, as if the work of Card and Krueger had never happened. I have sometimes wondered whether in Germany business has an influence on the economic debate that in the UK and US has been replaced by the influence of finance, but that at the moment is purely a speculative idea.

[1] An important point to note here is that if you have a target for the level (or path) of the money stock, then wage and price flexibility might get a closed economy out of recession if it was successful in raising inflation expectations. However the ECB has an inflation target and not anything like a price level target.


  1. I don't think German business has the same direct influence on the economic debate that finance does in the UK. You don't get the news reports deferring to someone from VW the way the BBC immediately goes hunting for a stock market analyst to comment on e.g. a new Budget.

    But the culture of exports definitely permeates. It's the culture of Germany as a small open economy, post WW2. International competition defined in largely zero-sum terms.

  2. "minimum wages have time and again been shown to help some workers earn more at the cost of the low-skilled losing their jobs"

    The solution is to offer a government job at the living wage instead of minimum wage legislation. We need business to replace people with machines.

    The job of the private sector is to automate everything and eliminate all private sector jobs with robots. Therefore it really is stupid to consider them job creators.

    "An important point to note here is that if you have a target for the level (or path) of the money stock, then wage and price flexibility might get a closed economy out of recession if it was successful in raising inflation expectations."

    None of that applies to the real world though.

    1. I am not an economist. "The job of the private sector is to automate everything and eliminate all private sector jobs with robots." Is this not what is called the "lump of labor fallacy?" Is it really not a fallacy?

  3. I have a feeling that we are all going to be blowing windmills here, as is always the case. Mainstream economists will see what they want to see, and will be guided by their models. This makes almost any discussion with people outside the mainstream profession a non-starter. We will just talk over each other. What neo-classical economists will want to argue is that Germany has succeeded as a nation (perhaps the most successful European nation, whether in terms of GNP or equality) at the expense of others. Cynical rubbish. And as usual, they will not ask basic, and most interesting, questions: if that is so, and given neo-classical theory's basic assumption that individuals and countries act in their own self-interest (fair enough) why is that it has succeeded with such a strategy and other countries have not? Do you think Britain could pull off what Germany did with its prices and incomes policies?

    But IS this country really acting in a narrow self-interest? How do you explain the refugee intake. Oh of course, you think it is to offset ageing (usual drivel that comes out of the OECD and similar such institutions). Really, do you really think that was the motivation of such a politically risky policy? What planet are you on Simon?

    And really, do you think that Germany's prices and incomes policies are a mercantilist operation to achieve price advantages over trade partners?

    If you want to understand the German economy and policy making you have to read things by people who understand Germany. For all sorts of reasons that is unlikely to be mainstream economists. I suspect German economic departments are peripheral adjuncts of MIT who start teaching their students with Mankiw. They do not know anymore about how the German economy works than you do. What they say will be a mirror of what you say and understand. The real work, which involves historical, political, social and institutional understanding will be done outside these departments.I suspect accessing this information will not be easy to the uninitiated, and the really informative information will be written for Germans which means it will be in German. (If only we all could all be real internationalists like Lars Syll who speaks 6 languages - but for also many reasons that is unlikely to happen among neo-classical economists.) But you have a German studies department at Oxford (I think) so it would be worth to go and see what they say. That is the sort of reason these departments exist. They should have people there who have a proper understanding of ordoliberalism etc.

    I think it would be great if we all could really understand how Germany works. I for one definitely want to know. But please, please, start thinking outside Model.


    1. NK
      ... a good comment. Some laymans points from Germany.

      1. If the refugee intake had been allowed for demographic reasons, families with many young kids should have been preferred: Vulnerability is high, ethic arguments are obvious and there are good reasons to believe that integration works easily. I just have to look at my sons kindergarten. Absolutely no problems with young kids and their parents. The combination of Merkels ambition to stabilize south-eastern Europe and the commitment to help by large parts of the younger population were the main reasons for the refugee intake. I think in fact if the whole situation could have been organized in a more controlled manner the social capability to give shelter for more people were not exhausted today.

      2. I can remember sitting at the dinner table with my father in the eighties. He was working for a company that struggled with far-eastern, esp. japanese competitors. He was all about we are to slow, we are to expensive, unions claims are destroying our few advantages and so on. And i think in his small world - he was no academic, just a lead worker - he was correct. The company doesn't exist anymore, mainly due to heavy competition and lack of enterprise. So that point of view has been socialized into (my) thinking from the very beginning.

      3. You can't tell the story of Germanys economic and social decisions in the last 25 years without telling the story of reunification. Everybody who ignores that is wrong and it is important to understand wage moderation discipline and social cohesion. Reunification was task and duty.

      4. There will be no huge ad-hoc wage increase or smth like that in Germany. Period. There are no tools to establish this and there is simply no way to communicate it. And even if a sorcerer could enforce it, perhaps disruptive effects yielded suddenly. There have been moderate wage increases in the last years. If that is "enough" for the disciplined rest of the Eurozone, things may be ok.

      5. There will be no transfer union in the foreseeable future. The merits of the club med is bad in Germany at the moment. That might be based on wrong prejudice, but it's a fact. Germans don't think they owe smth. to e.g. Italian people in contrast to e.g. Syrian refugees. And like you mentioned .. a macro econonomic model won't help here. I think there could be room for some kind of EU-wide social security like an eu-wide unemployment insurance, that's probably not totally impossible, transfers that go directly to the people. But intergovernmental transfer are absolutely impossible at the current state. That is what Germans mean when they talk about lack of trust.

      6. I don't think that much would happen, if Greek debt was reduced noticeably. Most people have accepted it as a learning experience, and some might even recognize that todays creditor nations fault was huge as well. But there is no way for the CDU (Merkel and Schäubles party) to communicate that for the time being. Mainly because everybody expects others to raise their fingers immediately as well. That is what Germans mean when they talk about moral hazard.

      7. Despite the Euros importance for German success, the Germans don't really cling to it. If Europes economic gordian knot is cut be dumping the single currency, it should be done. Perhaps other solutions are simply to complicated - especially in terms of communication and balance of interests.


    2. JH, a lot of material in your response that is pause for thought. On 5 and 7 I think you are right: a centralised European transfer system such as EU social wide social security that would call for fiscal and political is unlikely in this political environment.

      But there is another way. I call it a Marshall Plan for Southern Europe. The Marshall Plan did not require international political union and could operate under the Bretton Woods Fixed exchange rate mechanism. Southern Europe's infrastructure needs developing. It has experienced considerable competition since the entry of eastern Europe where infrastructure is better and this has, I understand , led to German FDI being redirected to this area. Government capital investment can concentrate on those parts of the infrastructure that connect the South to the North that would be followed by German FDI that would assist in the industrial development of the Southern periphery. The result would be advantageous to both Germany and the southern Eurozone.


  4. What I take away from this brief note is that macroeconomics as a factor in Germany's economic policy-making is mostly a matter of what serves its self-interest. Germany has dominated and benefitted from the Euro system while most other members have suffered badly. They are, however, stuck with the euro and can't easily extract themselves from it. The questions are, how long can the euro survive in such a situation? Until it is in Germany's interest to abandon it? How can Germany play the critical role of the EU's biggest economy if it is ethically if not politically compromised in this fashion?

    1. It is now common knowledge that the Euro was forced on an unwilling Germany. Germans then adapted and made the best of things. If there is anybody to blame, it is those politicians - French president Mitterrand and Italian premier Andreotti - who demanded the Euro as the price of German reunification, and then the leaders of those countries that didn't adapt: After all, if Germany could, why couldn't they?

      As for self-interest, how many governments are there that will say that they are not acting in their country's interest, but in that of other countries? How many arevthere thar will survive an election after that? Name three.

      As for

  5. Simon and NK above both refer to German economic self-interest as do German economic analists from time to time; and some of them assume that it's the most normal thing in the world to base one's policy upon national interests.

    Since the Maastricht Treaty, the European treaties include the following:
    "Article 121
    1. Member States shall regard their economic policies as a matter of common concern and shall coordinate them within the Council, in accordance with the provisions of Article 120.
    2. ..."
    (Art. 121 TFEU; it was art.99 in the Maastricht Treaty)
    Under that Treaty article much of the EU economic policy coordination is taking place where no country can defend a policy with reference to its own interests. So a useful adviser of the German government cannot base her/his advise on whether that a policy is good for Germany only.

    nb: I share NK's view that Germany's welcoming attitude should make you think twice whether this is a correct in any case

  6. Most unsettling was indeed the public debate about minimum wage in which a substantial proportion of the institutes seemed to ignore not so recent research as they came up with huge numbers of job losses.

    "Entgegen den neueren Erkenntnissen der internationalen Mindestlohnforschung, die mittlerweile mehrheitlich davon ausgeht, dass es keinen direkten Zusammenhang von Mindestlöhnen und Beschäftigungsentwicklung gibt (Bosch/Weinkopf 2014), hat der überwiegende Teil der deutschen Wirtschaftswissenschaft die Auffassung vertreten, dass die Einführung des Mindestlohns sich deutlich negativ auf die Beschäftigungsentwicklung auswirken würde. In zahlreichen Studien wurden mehrere Hunderttausend bis hin zu 1 Millionen Arbeitsplatzverluste prognostiziert (für einen Überblick: Schulten/Weinkopf 2015)." (chapter 5/page 14)

    Of course it's early days but so far nothing of the job destruction has happened, as was to be expected with the international research in mind. Hopefully this grand real life experiment will result in critical questions about the way of macro in Germany. Then again we had some other big real life experiments and not so much has changed. Maybe this time it is different.

    P.S: The 'Mankiw' was indeed the 'textbook' at my university.


  7. In 2006 180 economists in the most important universties and institutes were asked to answer six questions about minimum wage. 51 answered and to be honest some results were surprising, for example for question 2:

    2. Welche Folgen hätte Ihrer Meinung nach die Einführung eines branchenübergreifenden Mindestlohns?

    Die Ökonomen sehen vor allem zwei Gefahren: Durch einen Mindestlohn würde die "Entstehung von Arbeitsplätzen für Geringqualifizierte verhindert", meinen 94 Prozent, und die "Schwarzarbeit gefördert" (82 Prozent). Wenig wirksam sei ein Mindestlohn bei der "Erhöhung der Massenkaufkraft (74 Prozent). Lediglich 6 Prozent der Befragten glauben, dass ein Mindestlohn "Schutz vor Lohndumping" bietet.

    Sadly we don't have the raw data, but 76% stating that minimum wage was 'little effective' at raising purchase power and only 6% supporting the idea that it protects from dumping?

    Noteworthy are also the answers to number 6, about the experiences in other European countries. Roughly half doubts that those can be applied in Germany while 41% think they have been negative. Only 18% see no significant negative effect in those countries.

    Obviously it is all very simplistic but there seems to be a strong trend.

  8. I always was of the impression that German macro was also the foundation of the old Bundesbank "had money" policy, which seemed to reflect Austrian ideas of a survival of the fittest/weeding out of the weak as a motor of productivity and future growth. Isnt this a major weakness of the zero/negative interest rate policies of today, that the evolutionary pressure on firms is basically absent at least from a monetary point of view?

  9. Ja, we have ways of making you inflate.

  10. Part of the problem here is surely a cultural one which can be summed up as a Germanic commitment to Kantian absolutism. Sound money is such a simple and (superficially) sensible idea that it must be correct, right? And if it is correct then it should be enforced categorically. There is no room for economic principles that are not universal, simple and timeless.

    I have often thought that Keynesian ideas in macro are similar to relativistic principles in Physics – they don’t always apply, are counterintuitive, but when the conditions are appropriate, their effects are impossible to ignore.

    German economists often seem to me to be like early 20th century (German) physicists who couldn’t or wouldn’t accept relativity. And the branding of Keynesian macro as “Anglo-Saxon Economics” echoes a similar branding of relativistic physics in the early 20th century.

    1. I've heard this 'Kant', 'acting to duty' BS before.

      Why did the Germans sign up to bailing out banks exposed to Greek government debt with public money, rather than letting the banks go to the wall, writing out the losses on both sides, and recapitalising them via the administration process?

      We already know that debtor’s prisons don’t work. That’s why we created the bankruptcy procedure. Where was the acting according to duty there and forcing the private bankruptcy system to do its work – regardless of the feared ‘bad’ outcomes?

    2. Random:

      Governments have to bail out their banks because banks have their citizens' money in their hands. That is why all -repeat all - governments bail out their banks, e.g. RBS, Commerzbank, Bankamerica, whatever. The reason is that letting an important bank go bankrupt has greater consequences than bailing it out. That's reality - get used to it.

    3. No anonymous. You just insure depositors and let the shareholders etc take a cold bath.

      Thanks for being a shill though.

    4. Ooh, great consequences. Perhaps the government should cut taxes and raise spending.

      "That's reality - get used to it."

      Why can't the government inject money into a bank shell? Oh wait they can.

      But the government really fails by failing to provide an inherently risk-free storage and transaction service in its fiat for all citizens - leaving them to the mercy of usurers.

    5. Random,

      Am I correct in assuming that you believe all Western governments to be dominated by banks and financial interests - presidents Obama and Hollande, chancellor Merkel et al.?

      Why did they bail out banks rather than follow your advice? Because banks, bad as they are, know more about managing money than governments. So mistakes by some banks have less important consequences than mistakes of governments that concern us all.

  11. pProf. Wren-Lewis,

    "I hope it does not need spelling out that this route out of demand deficiency only works by taking demand from other countries."

    When Tesco lowers its prices, it takes demand from its competitors.When American frackers raise the supply of oil, that takes demand from Saudi Arabia. When Saudi Arabia lowers its oil price, it takes away demand from American frackers.

    Terrible, isn't it?

    Other people call that competition. Some of rhem find that terrible. But economists?

    Bear in mind that German export surpluses are not the result of government policy, but of innumerable private decisions by buyers and suppliers and, as far as unit labour costs are concerned, by German firms and German unions - not by the government, which is unhappy about the surpluses for diplomatic reasons.

    So kindly adjust your views to reality.


Unfortunately because of spam with embedded links (which then flag up warnings about the whole site on some browsers), I have to personally moderate all comments. As a result, your comment may not appear for some time. In addition, I cannot publish comments with links to websites because it takes too much time to check whether these sites are legitimate.