by Colman
Thu Oct 18th, 2007 at 11:38:03 AM EST
Those of you who have been here a while will remember that when ET started up we wrote a fair bit about the "need for reforms" in Germany and the lies being told about German unemployment. Soon afterwards Merkel was elected and the media assumed that her reforming crusade had sorted out all the problems with the German economy so stopped talking about it. Strange that.
Anyway, now that there is a movement to undo some of the reforms in the labour market in Germany the issue has been picked up by the media again, with employers unions warning that the recent up turn in Germany's fortunes will be undone as well.
Eurozone watch has done two stories that question the link between those reforms and the economic growth.
Against this argument, a look at the German stock price developments relative to those in France over the past 10 years is quite illustrative (figure 3 below): At a 10-year-horizon, stock prices increased almost exactly as much in Germany as they did in France. During this time, Germany introduced the Agenda 2010 reforms which supposedly have improved the profit outlook and the supply side of the economy significantly. France, on the other hand, over the same period did very little to please supply-side economists: The time span actually covers the time of the Jospin government in which the 35-hour-work-week was introduced which increased labour costs and which has repeatedly criticised of hurting competitiveness and growth.
What matters of course for competitiveness, however, is the nominal wage increase relative to productivity as measured by unit labor costs. Figure 4 shows the relative nominal unit labor cost index of several countries relative to the Euro area average (1998 = 100), the calculations are explained in a paper by Dullien and Fritsche (2006). Again, it is impressive to see how Germany steadily improved its competiveness over 10 years in a row — whereas other countries in the Southern cone of the Euro area show a steady decline over the same time span. But there is no evidence whatsoever that this trend accelerated after March 2003 when the Agenda 2010 was introduced (or after 2005 when it came into effect).
The reforms might have helped company profits, but they don't seem to have helped anything else: even long-term unemployment has been barely deneted.
