ECB and Inflation

[Sheilbh]

Draghi, the IMF and the Commission have all warned about a Grexit this week. It's on the cards and being publicly discussed now. The IMF and Draghi have also said the EU should shorten and simplify their list of issues in negotiations.

I can't help but feel that all the IMF and ECB talk of 'uncertainty', 'uncharted waters' and emphasising that 'one should not underestimate the risk of a Greek exit' are aimed at one, famously cautious woman - who is, according to Greek sources, the only friend the Greeks have left in Europe

Edit: Incidentally, on the madness of Germany not taking advantage to invest in infrastructure, apparently the German Economy Ministry says there's more than €150 billion worth of investments in municipalities needed.

[Zanza]

According to various rankings, Germany (still?) has among the best infrastructure in the world. Sure, you can always build more. I wonder what the supposed positive benefit for the Eurozone is supposed to be though. Just increased economic activity in Germany that may then trickle down to the other EZ countries? If so, that seems insignificant.

Anyway, Germany has a rapidly aging society and will soon have a shrinking workforce. Using the current windfall to prepare for the next crisis and the predictable loss in economic dynamism when more and more people retire seems sensible. The current debt level is not sustainable long term.

[The Minsky Moment]

The issue with Germany is not so much insufficient infrastructure expenditure (*cough* USA *cough*) but how the corporatist labor structure, which once was a vehicle for improving worker living standards, turned into a vehicle for coordinated wage suppression as part of national strategy of internal devaluation.  There might have been a brief period in the Schroeder era were that might have made sense, but it passed a while ago.  Germany is now running current account surpluses of over 7.5 % which in the current context is really not helpful.

Somehow the history of whatever they call the Trente Glorieuses in German has been forgotten - namely that Germany initially regained competitiveness not through wage restraint but by trying to keep the D-mark on the weak side pre-Plaza Accords.  When the history of the Euro is written, someone may observe that one of the problems of the Euro was it made German economists go nuts; the latent fear of sharing their currency with Italians and Spaniards drove them into currency perma-hawkishness, thus leading to this voguish but dangerous fascination with internal devaluation as a policy tool.

[Zanza]

The era of wage suppression in Germany might finally be over if you follow the latest news. But the corporatist stakeholders are interested in keeping Germany competitive and as our absolute wage levels are still high compared to most countries, they will not let them grow too much.
http://www.ft.com/intl/cms/s/0/b8af9568-d844-11e4-8a68-00144feab7de.html#axzz3XmdN0MWU


When you refer to the pre-Plaza accords weak exchange rate of the DM, the same currently happens. Most economists seem to agree that the Euro is too weak for Germany when seen as a separate unit.

[Sheilbh]

According to various rankings, Germany (still?) has among the best infrastructure in the world. Sure, you can always build more. I wonder what the supposed positive benefit for the Eurozone is supposed to be though. Just increased economic activity in Germany that may then trickle down to the other EZ countries? If so, that seems insignificant.

I'll add more later. I think broadly you're right it would be relatively low trickle-down benefit - though after 5 years of almost 0% growth even the possible 0.2% benefit to, say France, would be good. The biggest argument for improving German infrastructure is self-interest. My issue with it from a Eurozone perspective is more the monomania it indicates about debt in Berlin that despite problems with interest and 30 year bonds at 2.3% (so quite possible free once inflation's taken into account) there's a huge reluctance to invest.

But yes, Germany has some of the best infrastructure in the world but it is one of the only major advanced economies that's persistently declining in the ratings and has been for about 10 years the other exception is the US.

German public investment is at a historic low and compared with similar nations - ie. advanced export focused economies - is investing significantly less. As an export and trade driven nation infrastructure matters even more and your competitors are putting money into getting equal with or overtaking Germany, while Germany - despite being able to fund hundreds of billions of Euros worth without breaking the fiscal rules - is continuing to decline in the ratings. I think Germany's got an economic advantage in her infrastructure but no right to successfully compete if it's allowed to continue to decline.

[The Minsky Moment]

The era of wage suppression in Germany might finally be over if you follow the latest news.

Yes.  Too late, hopefully not too little.

When you refer to the pre-Plaza accords weak exchange rate of the DM, the same currently happens. Most economists seem to agree that the Euro is too weak for Germany when seen as a separate unit.

Same now but look how long it took before the ECB could break through the Bundesbankish* lobby.  Way behind the UK, US, Japan.  The Euro should be too weak for Germany now.  That is what it means to have a unified currency bloc.  No one frets in the US when inflation goes up in one state or region.  It's part of the process of getting to balance.

*because the tendency is not a purely German phenomenon.

[Zanza]

Is there more than the one study by the WEF that actually shows a decline in German infrastructure?

Worldbank "Logistics Performance Index" rates German infrastructure best in the world.
WEF "Global Competitiveness Index" rates German infrastructure seventh and shows a declining trend.

When I look at a report by a German institute, it ranked Germany third in the world (after HK and Singapore). But what is more interesting is the longer term trend they showed: namely that Germany made massive progress since reunification in 1990 when it was 14th.

I wonder if the people that say Germany has declining public infrastructure ever drove on the perfect autobahns we built in Eastern Germany or took the new train lines from e.g. Hanover to Berlin. I would definitely agree that too much infrastructure was built in Eastern Germany and too little in Western Germany in the last two decades or so. But too little in general...hmm.

[Admiral Yi]

The era of wage suppression in Germany might finally be over if you follow the latest news. But the corporatist stakeholders are interested in keeping Germany competitive and as our absolute wage levels are still high compared to most countries, they will not let them grow too much.

Absolute wages only tells you part of the story.  What you really need is unit labor costs.

[Syt]

Zanza, have you read this article? http://www.zeit.de/mobilitaet/2014-09/deutsche-bahn-bruecken-zustand

[Zanza]

Zanza, have you read this article? http://www.zeit.de/mobilitaet/2014-09/deutsche-bahn-bruecken-zustand

I read it now. The article says it is not economical to renovate a lot of the railway bridges in Germany and it is more economical to build a new bridge. It also says that all bridges are safe. I don't see why this would be alarming at all. I expect that a state-owned company like DB evaluates whether renovation or replacement is the more economical option for each bridge. It also doesn't say much about the general state of infrastructure. Even a perfectly sound bridge might be extremely expensive to maintain and could be replaced cheaper with a new bridge.

[The Minsky Moment]

The era of wage suppression in Germany might finally be over if you follow the latest news. But the corporatist stakeholders are interested in keeping Germany competitive and as our absolute wage levels are still high compared to most countries, they will not let them grow too much.

Absolute wages only tells you part of the story.  What you really need is unit labor costs.

German unit labor costs are probably pretty high but German labor productivity is high too.  I.e unit labor costs should be high.

[Sheilbh]

Interesting:
http://www.reuters.com/article/2015/04/20/ecb-policy-greece-idUSL5N0XH35120150420

Constancio has also been breaking the rules in his comments on the effects of fiscal consolidation recently.

[citizen k]

http://www.zerohedge.com/news/2015-04-20/stunned-greeks-react-initial-capital-controls-and-decree-confiscate-reserves-and-the

And the punchline is that the use of confiscated proceeds is unclear: the government says it is to pay pensions and wages, but recall that the same government recently confiscated pensions to repay the IMF, so according to the chain of logic, the government first raided pensions, and now municipalities, just to repay the dreaded Troika.

[grumbler]

http://www.zerohedge.com/news/2015-04-20/stunned-greeks-react-initial-capital-controls-and-decree-confiscate-reserves-and-the

And the punchline is that the use of confiscated proceeds is unclear: the government says it is to pay pensions and wages, but recall that the same government recently confiscated pensions to repay the IMF, so according to the chain of logic, the government first raided pensions, and now municipalities, just to repay the dreaded Troika.

The author at zerohedge.com should learn what the word "fungible" means (beside the fact that it means his argument is silly).

[Admiral Yi]

German unit labor costs are probably pretty high but German labor productivity is high too.  I.e unit labor costs should be high.

Unit labor costs incorporate productivity.  They are the labor costs to produce a unit of output.  Theoretically, German unit labor costs should trend towards parity with ROW.