countries with weak welfare states, lower real wages, and well-organised labour movements, such as Greece, Portugal, Italy and Spain, have been unable to squeeze workers equally hard. Ireland, on the other hand, has been at the forefront of imposing more liberal conditions on its workers. Unfortunately for the Irish elite, this did not spare the country from the severe impact of the crisis of 2007–9.
The determinants of German competitive success
The difference in outlook between Germany and the peripheral countries can be demonstrated by considering the behaviour of nominal labour unit costs, that is, nominal labour remuneration divided by real output. Nominal unit costs can be disaggregated into nominal cost per hour of labour divided by labour productivity. This is a standard measure used to compare competitiveness internationally.8 The trajectory of nominal unit costs, therefore, gives insight into the variation of nominal cost of labour relative to labour productivity. This trajectory is shown in figure 10 for all the countries in the sample with 1995 as base year. Note that data on productivity is notoriously unreliable, thus the evidence should be used with considerable caution.
Fig. 10 Nominal Unit Labour Costs (1995 = 100)
Source: AMECO
Fig. 11 Real Compensation of Labour (1995 = 100)
Source: AMECO
The most striking aspect of this data is the flatness of nominal unit labour costs in Germany. It appears that the opening of Eastern Europe to German capital together with sustained pressure on pay and conditions has forced nominal labour costs to move at an almost identical pace to productivity. However, in peripheral countries things have been different. Unit labour costs have increased significantly as nominal labour costs have risen faster than productivity, with Greece in the lead. In short, peripheral countries have been losing competitiveness relative to Germany in the internal eurozone market.
The more rapid rise in nominal labour costs was accompanied by generally higher inflation in the periphery compared to Germany, as was previously shown in relation to figure 3. Nevertheless, nominal labour costs rose generally faster than inflation, thus leading to increasing real compensation of labour in the periphery, as is shown in figure 11 (definition in footnote 8). Extra care is required here as real compensation is not the same thing as real wages, and moreover it hides a broad range of payments to managers and others in the form of wages and bonuses. Furthermore, the aggregate conceals considerable inequality in real wages among different groups of workers. Still, figure 11 shows that the real compensation of labour has risen faster in peripheral countries compared to Germany, with the exception of Spain.
Real compensation and the share of labour in output
It is no wonder, therefore, that conservative commentators in the press have remarked that the sovereign debt crisis ultimately derives from peripheral country workers receiving higher increases in compensation than German workers, leading to a loss of competitiveness.9 This is true, but also misleading. The real problem has not been excessive compensation for peripheral workers but negligible increases for German workers, particularly after the introduction of the euro. Even in Greece, in which nominal and real compensation have increased the most, the rise in real compensation has been only of the order of 20 percent during the period of 2000–8, and that from a low base compared to Germany.
The modesty of labour remuneration in the periphery becomes clear when put in the context of productivity growth (fig. 12).
There has been weaker productivity growth in Germany compared to the rest during this period, with the exception of Spain which has been extremely weak. This is more evidence of the lack of dynamism of the German economy: Irish, Greek and Portuguese productivity rose faster, even if from a lower base (Irish productivity is probably exaggerated for reasons to do with multinational transfer pricing). Peripheral countries have generally improved productivity, and certainly done better than Germany, which has been a laggard. But the Lisbon Strategy has not succeeded in putting peripheral countries on a strongly rising path of productivity. There has been no true catching up with the more advanced economies of the eurozone, with the partial exception of Ireland. Productivity increases have been respectable compared to Germany, but that is because Germany has performed badly.
Fig. 12 Labour Productivity (1995 = 100)
Source: OECD
Nonetheless, productivity growth has still been faster than the rise in real remuneration of labour. Consequently, labour has lost share in output more or less across the sample, as is shown in figure 13 (definition in footnote 6). The only sustained increase after the introduction of the euro has been in Ireland, but even there workers barely made good the losses sustained in the 1990s. Workers have generally lost relative to capital across the sample, German workers faring poorly compared to the others.
To sum up, labour market policies at national and EU level have applied sustained pressure on workers across the eurozone. This pressure has played an important role in determining competitiveness, given the rigidity of monetary and fiscal policies. The result has been loss of output share by workers across the eurozone. In peripheral countries real compensation has increased in some countries, though productivity has increased even faster. Nonetheless, productivity did not rise fast enough to ensure catching up with the more advanced economies of the core.
Fig. 13 Labour share in GDP (1995 = 100)
Source: AMECO
In Germany, on the other hand, productivity, real compensation, and nominal unit labour costs have increased very slowly. It cannot be overstressed that gains in German competitiveness have nothing to do with investment, technology, and efficiency. The competitive advantage of German exporters has derived from the high exchange rates at which peripheral countries entered the eurozone and, more significantly, from the harsh squeeze on German workers. Hence Germany has been able to dominate trade and capital flows within the eurozone. This has contributed directly to the current crisis.
4. INTERNATIONAL TRANSACTIONS: TRADE AND CAPITAL FLOWS IN THE SHADOW OF GERMANY
Current account: Surplus for Germany, deficits for periphery
The international transactions of eurozone countries have been shaped in large measure by the policies adopted to support the euro. The euro has been devised as a common measure of value and means of payment within the eurozone; the intention was that it should also become means of payment and reserve outside the eurozone, thus competing directly with the US dollar as a form of world money in the world market. Monetary and fiscal policies of eurozone countries have had to be consistent with this aim, thus imposing a common monetary policy and tight constraints on fiscal policy for each state. The institutional and policy framework of the eurozone have not arisen merely due to ideological dominance of neo-liberal thinking within the EU. They have also been dictated by the need to sustain the euro in its role as world money within and outside the eurozone.
The pattern of international transactions that has emerged for eurozone countries is consistent with the putative role of the euro. In the first instance, peripheral countries were obliged to join the euro at generally high exchange rates. Core countries, above all Germany, insisted upon this policy with the ostensible purpose of ensuring low inflation. High inflation in individual countries would have undermined the ability of the euro to compete internationally
