[Review] Flassbeck, Heiner - Fundamentals of Relevant Economics - Consistent Derivation of the Euro Crisis

Siehe auch:
[Rezension] Heiner Flassbeck - Grundlagen einer relevanten Ökonomik - Konsistente Herleitung der Euro Krise

Heiner Flassbeck is an economist from Germany. The economist born on December 12, 1950 was among other things State Secretary in the Federal Ministry of Finance under Oskar Lafontaine (SPD) from 1998 to 1999. And from January 2003 to the end of 2012 he was Chief Economist (Chief of Macroeconomics and Development) at the United Nations Conference on Trade and Development (UNCTAD). Flassbeck publishes among other things on Makroskop and Relevante Ökonomik in German and on Flassbeck Economic in English.

The book "Fundamentals of Relevant Economics (Grundlagen einer relevanten Ökonomik)" was written together with co-authors Friederike Spiecker, Patrick Kaczmarczyk and Alexander Mosca Spatz. The book is clearly specialist literature in nature but not a pure textbook. Although connections are discussed in detail at the level of specialist articles no absolute fundamentals are conveyed. The quality of the derivations is very high as the arguments are based on empiricism and logic rather than made in a vacuum. This sets the author apart from any ideology despite the topic. The book gains additional importance due to the current recession.

Although it is neither the focus of the book nor a dedicated chapter, Flassbeck provides a consistent analysis of the euro crisis throughout the book. This is not surprising as this analysis is a key focus of Flassbeck's work. Flassbeck argues that since monetary union Germany has pursued a policy of wage restraint and with the resulting foreign trade imbalances has imported demand for goods and services from other countries. A monetary union inevitably means the abolition of exchange rates between member states and consequently the abolition of member states' ability to regulate their competitiveness and foreign trade balances.

The Unit Labor Costs

Unit labor costs are wages divided by productivity. Unit labor costs are therefore the costs per standardized unit of labor. Consequently unit labor costs can also be used to compare the competitiveness of national economies. [1, p.389-396]

[5, PLCD]

If we look at the representation of unit labor costs in the monetary union at the beginning of the monetary union it is immediately apparent that wages in Germany have grown too little. The logical consequence would be for the country with the lowest unit labor costs to draw demand from abroad and build up an export surplus. And as long as the country with the lowest unit labor costs still has spare production capacity it can be assumed that the other countries are at an absolute disadvantage. [1, p.377-380, p.389-396, p332-343]

[5, UVGD] [5, UXGS] [5, UMGS]

And indeed foreign trade imbalances did occur in the Eurozone. The countries in the Eurozone with export surpluses/import deficits therefore lived below their means because they produced more goods than they consumed. And in the Eurozone this essentially applies to Germany. And the countries in the Eurozone with import surpluses/export deficits therefore lived above their means because they consumed more goods than they produced. Overall the dependence of the countries with export surpluses/import deficits on exports increased. And at the same time the countries with import surpluses/export deficits lost production of goods and consequently jobs. [1, p.389-396]

The Sectoral Balances in the Monetary Union

When individual actors or entire sectors in an economy save demand is withdrawn from that economy. This happens when revenues exceed expenditures. And a shrinking of aggregate demand directly results in a shrinking economy. The government can offset these savings with a budget deficit. What individual actors save and don't demand the government can demand instead. The government can therefore maintain economic growth or avert a recession with a budget deficit. However with budget surpluses the government would be guaranteed to worsen a recession because demand is withdrawn from by the government. This is particularly influential because individuals tend to save or restrain themselves when the economy is poor. [1, p.195-200]

[5, UVGD] [5, UBCABOP] [5, UBLC] [5, UBLH] [5, UBLGE]

And since Germany has achieved an absolute advantage over almost all other member states in the Eurozone foreign trade imbalances have arisen. It is therefore not surprising that most economies in the Eurozone are experiencing problems one of which is their import surplus/export deficit. And to offset this import surplus/export deficit the affected countries are running increased budget deficits. This is not so much a sign of supposedly irresponsible fiscal policy but the only remaining option for maintaining economic growth. [1, p.189-194]

Battle of the Nations

While several Eurozone member states have managed to shift from an import surplus/export deficit to an export surplus/import deficit the remaining problem for these countries remains flawed analyses and policies. Thus the struggle of nations with wage restraint is being pursued as the only conceivable solution. [1, p.327-331]

Wages are the largest cost for companies and at the same time the largest source of income for other companies. Unemployment is not simply a result of excessively high wages thus excessively high prices for labor. While higher wages also drive the need for investment to increase productivity this dynamic does not work the other way around. Low wages cannot reduce unemployment because existing technology-/capital-intensive production cannot simply be replaced by low-technology/labor-intensive production. Companies do not simply eliminate machinery and equipment when wages fall in order to increase the demand for employers. Companies would thereby deprive themselves of a competitive advantage and make their previous investments obsolete. There is no substitution of capital for labor driven by wage levels. [1, p.224-232]

[5, ZCPIN] [5, UVNT] [5, NLHT]

Nevertheless several countries attempted to eliminate unemployment through lower wages. The assumption was that if the price of labor in the form of wages fell, demand for labor would increase and unemployment would fall. In reality the real decline in wages has led to a real decline in demand and consequently to rising unemployment. [1, p.224-232]

[5, ZUTN]

[5, OVGD]

For an economy individual companies can gain an advantage by reducing their own wage levels to enable lower prices. Individual countries can gain an advantage by reducing their own wage levels to enable lower prices in foreign trade. However such a dynamic depends on the exchange rate of the domestic economy. If the exchange rate changes to a balanced current account (foreign trade balance and capital transfers) then the effect disappears. In a currency union this dynamic is particularly amplified. In a currency union there are no exchange rates with which to balance the current account. [1, p.224-232]

Src:
[1] Heiner Flassbeck - Grundlagen einer relevanten Ökonomik - ISBN 978-3-86489-414-5
[2] Makroskop
https://makroskop.eu/
[3] Relevante Ökonomik
https://www.relevante-oekonomik.com/
[4] Flassbeck Economics
https://www.flassbeck-economics.com/
[5] AMECO - annual macroeconomic database / jährliche makroökonomische Datenbank
https://economy-finance.ec.europa.eu/economic-research-and-databases/economic-databases/ameco-database_en

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