in Ireland in the 2000s. Households across the periphery have found it difficult to sustain consumption on current income. The exception is Germany, where saving rose in the second half of the 2000s, in line with weak consumption. German growth, such it has been in the 2000s, has come neither from investment nor from consumption, but from exports. Persistent pressures of stagnation, and even contraction, in the domestic German economy have been fundamental to the evolution of the euro, directly contributing to the sovereign debt crisis.
Fig. 6 Household Consumption (percent of GDP)
Source: Eurostat
Fig. 7 Saving (percent of GDP)
Source: Eurostat
Debt
Household debt has risen consistently across peripheral countries in the sample. Financialisation of individual worker incomes has proceeded apace among peripheral countries of the eurozone throughout the last two decades. Growth of debt has been driven by consumption but also by rising prices of real estate. Low interest rates in the 2000s, as the ECB applied the same monetary policy across the eurozone, allowed workers to increase indebtedness. In particular, Portugal, Spain and Ireland have approached ratios of household debt to GDP of around 100 percent (fig. 8). These are very high levels of debt that will be difficult to support if unemployment and interest rates rise in the near future.
Fig. 8 Household Liabilities (percent of GDP)
Source: Eurostat, CB and FSA of Ireland
The vital exception is again Germany, where household indebtedness has declined, in line with weak consumption and the absence of a housing bubble. While households in peripheral countries have been accumulating debt as part of the integration of these countries in the eurozone, German households have been reducing the relative burden of their debt. This contrast is an integral part of the differential response of eurozone countries to the shock of the crisis of 2007–9, contributing to the sovereign debt crisis.
Corporate debt, meanwhile, has not shown a tendency to rise significantly across the sample in the years following the introduction of the euro, with the exception of Spain and Ireland, the only countries in which investment also rose significantly during the period (fig. 9).
Fig. 9 Non-financial Corporation Liabilities (percent of GDP)
Source: Eurostat, CB and FSA of Ireland
Recapping, macroeconomic performance of peripheral countries relative to Germany has demonstrated considerable variation but also common patterns. At the core of the eurozone, Germany has been marked by low growth, flat investment, stagnant consumption, rising saving, and falling household debt. Germany has not been a dynamic capitalist economy on any score. The only source of dynamism has been exports, for reasons that will become clear below.
Confronted with the stagnant and export-oriented performance of the dominant country of the eurozone, peripheral countries have adopted a variety of approaches. Thus, Spain and Ireland have had investment booms that were based heavily on real estate speculation and bubbles. Greece and Portugal, meanwhile, have relied on high consumption, driven by household debt. Indeed, household debt has risen substantially across peripheral countries. Italy, finally, has been lodged in what could only be described as stagnation throughout this period.
Integration of peripheral countries into the eurozone, in other words, has been precarious. This is apparent in their export performance, which is the mirror image of German performance, as is shown below. It is also apparent in the patterns of household financialisation, which have moved in the opposite direction to Germany. These structural contrasts lie at the root of the current crisis. The evidence also shows that it is fallacious to interpret the crisis as the result of inefficient peripheral economies being unable to deal with the efficient German economy. It is the size of the German economy and its export performance – which has very specific causes attached to the euro – that have allowed it to dominate the eurozone. Efficiency has had little to do with it. Consider now the labour market in order fully to establish this point.
3. LABOUR REMUNERATION AND PRODUCTIVITY: A GENERAL SQUEEZE, BUT MORE EFFECTIVE IN GERMANY
A race to the bottom
The EU has systematically promoted labour market reform aimed at reinforcing the process of monetary integration. Starting with the Maastricht Treaty (1992), social provisions began to be included in European treaties apparently to reinforce economic coordination. Labour market policies have been considered national initiatives; however, the Luxembourg European Council (1997) launched the first European Employment Strategy, followed by the Lisbon Strategy in 2000. The Lisbon Strategy stated the need for more flexibility in labour markets. The apparent aims were to achieve full employment, to create a knowledge intensive labour market, and to raise employment rates.
During the 2000s the Lisbon agenda was repeatedly reinforced, including by “Guidelines for Growth and Jobs”, “National Reform Programmes” and “Recommendations” from the European Council. Particularly after the de Kok report (2004), policy toward labour markets has stressed the need for flexibility, contract standardisation, promotion of temporary and part-time work, and creation of (tax) incentives to encourage labour force participation.6 It is also true that improving the quality of employment was emphasised by the Council meetings of Nice (2000) and Barcelona (2002). In practice, however, the pressure of reform has led to a race to the bottom for workers’ pay and conditions. Several European legislative initiatives have met with strong resistance in recent years, for instance, reform of the internal market in services (Bolkenstein directive), or the new Working Time directive that would potentially increase the working week to sixty-five hours. Partly as a response, the European Commission has recently promoted a general agenda of reform focused on the Danish model of “flexicurity” – weak legal protection of labour relations compensated by strong state support for the unemployed.
Given that a single monetary policy has applied across the eurozone, and given also the tough constraints on fiscal policy (through the Stability and Growth Pact) labour market policy has been one of the few levers available to different countries to improve external competitiveness. Therefore, the effects of labour market policies have varied profoundly among different eurozone countries. Core countries have been historically characterised by high real wages and strong social policies, while peripheral countries have typically had low real wages and weak welfare states. Political and trade union organisation has also differed substantially among eurozone countries. All eurozone countries have joined the race to impose labour market flexibility and compress labour costs, but from very different starting points and with different mechanisms.
Of fundamental importance in this connection has been labour market policy in Germany. Put in a nutshell, Germany has been more successful than peripheral countries at squeezing workers’ pay and conditions. The German economy might have performed poorly, but Germany has led the way in imposing flexibility and restraining real wages. Characteristic of the trend have been the labour market reforms of 2003 introduced by the Social Democratic Party and known as Agenda 2010. New labour contracts have reduced social contributions and unemployment benefits. Since the early 1990s, furthermore, it has been possible for German capital to take full advantage of cheaper labour in Eastern Europe. The combined effect of these factors has been to put downward pressure on German wages, thus improving the competitiveness of the German economy.7
Peripheral
