After I wrote my short critical analyses on Servaas Storm´s critical analyses concerning the meaning of German wage moderation or a wage restraint and unit labour costs I sent it to him for further discussion or critique. Here is his answer which I gratefully publish with his kind authorization.
Dear Thorsten Hild,
Thank you for your inspired criticism. I do not disagree much, actually – after all, I co-authored a book on inflation targeting, the NAIRU etc.
My argument (in the concluding para of the piece) is that because Germany kept wage growth below productivity growth, the wage share declined (and profit share increased), which actually slowed down the German economy. It also slowed down German import growth (via demand). It lowered German inflation, motivating the ECB to reduce the Eurozone interest rate. And the rest followed from the interest rate / inflation rate mismatches, especially in Southern Europe where wage growth exceeded productivity growth.
Where I disagree is this: even if all Eurozone members had kept to the rule that real wage growth be equal to labour productivity growth, hence all relative unit labour costs would have stayed (roughly) constant, then even in that case the imbalances would have arisen. The reason is that per cent of economic growth Southern Europe is importing (structurally much more) from Germany than vice versa. In addition, Southern Europe would still be faced with a too highly valued euro (which at the same time is too cheap for Germany), which is hurting their exports to the rest of world. So the structural divergence and trade imbalances would have been there even in the “perfectly balanced” case.
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