Mody Prime Time Interview; Wolf on Germany

The Mody interview is here.

Martin Wolf’s column on Germany is here.

34 replies on “Mody Prime Time Interview; Wolf on Germany”

“Professor Mody said the country’s growth over the last 12 months has been disappointing….”

Look over there! Latvia! Latvia!

I can tell from the line below that Mody, along with many others, are of the impression that collective saving is the blame for only an apparent lack of money in circulation during a recession.

“I’m afraid we are already five years into the crisis and with households continuing to try to catch up with their lost wealth, they are not spending … if the Government and households are both not spending, it’s not a surprise that the economy is not growing,”

But in actual fact when a bank processes a loan repayment electronically the money used to clear the debt no longer exists. This is why there’s less money during a recession and it also explains why reducing our debts doesn’t leave us in a better position. If loan repayments are greater than new loans the money supply contracts, particularly the important measure from the real economies point of view, M1.

For we have a debt-based monetary system. If new money is to enter the economy some entity has to walk into a bank and organise a loan. If no-one is willing or able to take on more debt the lifeblood of the economy, money, slowly dwindles.

Mody should more accurately have said ‘…if the Government and households are both not borrowing, it’s not a surprise that the economy is not growing,’

Wolf’s article is a Tour de Force.

@Paul F
That’s a very good point highlighting the mockery of a monetary policy transmission mechanism that we have in the EZ.

The ECB could have taken the tracker mortgages off the Irish banks in the name of improving the transmission mechanism and getting credit to the Irish economy (was this argument made by our esteamed civil servants, including PH?), but instead it preferred to put its head in the sand.

Make no mistake, if the same situation arose in Germany or France the ECB would be falling over itself to introduce exceptional measures to support monetary policy transmission.

What is most distressing about the current situation is that policymakers and some economists appear to echo the Dickens character Micawber in ‘David Copperfield’ that “something will turn up,” which is the benefit of a recovery in the economies of Ireland’s trading partners. However, given the severity of the recession, the end to easy credit and the extent of the public debt in the developed countries, there will not be a return to the mainly high growth two decades that preceded the economic crash.

I wrote the foregoing in June 2010.

There is no growth strategy and Minister Pat Rabbitte issued a press release with a comment today: “This Government remains staunchly committed to investing in Ireland’s knowledge economy. It is essential for the country’s recovery that home-grown ideas are nurtured to such point that they can flourish in their native environment and contribute to sustainable growth and this forms part of our action plan for jobs.”

All sounds grand but live horse and you’ll get grass.

The Government will begin announcing from Budget Day projects that will consume the €6.4bn residue by 2016.

There will be a lot of make-work schemes despite the OECD’s criticism of the administration of existing ones.

As for Ashoka Mody’s suggestion of no adjustment this year, such a move would likely put teh kaibosh on a standby facility in 2014.

How much real growth would result ? It would hardly be significant given the unsolved problems: 25% of loans impaired; 50% of SME loans banjaxed; high mortgage arrears and so on.

As for Martin Wolf, the IMF chief for Germany said in the latest Fund report: “I would like to highlight that the German current account surplus is not the result of targeted policy measures but the outcome of complex market processes and high (especially non-price) competitiveness of German enterprises. In addition, as staff highlights in both the staff report and the 2013 Pilot External Sector Report, policy gaps and the need for fiscal consolidation elsewhere play an important role.”

Germany could do more by reforming its services market and by encouraging wages to rise in line with productivity.

However, European Commission research shows that a 1% increase in German domestic demand would improve the trade balance of Spain, Portugal and Greece by less than 0.05% of gross domestic product. 

Given the strength at the top and among SME’s, no other country in Europe can match Germ exporting skills.

Maybe next week we will get Martin’s proposed solutions.

@ MH

It occurs to me that the current IMF chief for Germany is about as accurate in his explanations of the German export surplus as the then IMF chief, Mody, was, I understand, about the state of the Irish economy when he was in a similar position. If there is agreement on anything among various commentators, backed up by the data, it is that wage levels have been stagnant for a decade in Germany with the worst impact on those outside the major organised trade unions as a direct result of “targeted policy measures”.

However, I agree with your other points.

It seems to me that the FT’s star commentators are increasingly confused and bewildered about Germany, especially the comment by Martin Wolf which is OTT. Nobody is compelled to buy German products or to borrow money in order to do so. And there is considerable support for Merkel’s approach in the European electorate except where one would expect it to be otherwise.

Germany needs to accept that the process of reform also applies to it, and not just other European countries. Whether Merkel allies herself with the SPD or the Greens, change is coming as the result of internal, not external, political pressure. But the biggest pressure of the lot is that Germany is effectively funding the economic machinery of large sections of the EA economy through the liquidity operations of the ECB and the Target 2 system, a situation out of which it cannot reverse. Merkel seems to have half accepted the consequences of this situation, the remedying of which lies IMHO not so much in the much touted banking union – which tinkers only with the monetary plumbing – but the creation of a real as opposed to an imaginary single market in financial services, the characteristic which differentiates the EA most from the US.

Wolfie is on the money. How do we get growth going in the periphery, How about a depreciation of the currency via a return to national freely floating units.
Worked in the early 1990s. It is not rocket science. Add a soupçon of selective default and there you go.

It is such a mess. Beat Kappeler in the NZZ am Sonntag is a hard money head but he does have a point when he says that “loads of (QE) money is going to the wrong places – into property bubbles, insufficiently profitable companies, equities and overvalued bonds”.

Presumably punters will see the EZ as a better bet for stable money than the dollar with its 2% inflation target.

How to wean the world off CB cash is the big question.

The choice is simple. Stay in the EZ and buy undervalued German products, that the EZ is in effect subsidising, or leave th EZ, and, wait for it; let the market decide the value of the various currencies.
Wolf is correct. Germany is exporting bankrupcy. The economic version of the Falkenhayn ‘bleeding the French white’ of WW1.
It will end in chaos and product boycotts.
The EU is no longer an economic and social union. It is a winner take all market club, with the winner in control of the most important economic tool, the monetary system.

@ TMD et al

We must assume that we operate in a world populated by adults in the decision-making roles. Apart from nobody being forced to buy German products, or run up unsustainable debts to enable them to do so, no country was ever forced to join the euro. Many, including Ireland, ratified the decision to do so by popular referendum.

How best to live with the resulting situation is the question. Saddling one country with all the responsibility is neither an objectively justifiable approach nor particularly productive.


Germany can do better in helping low paid workers. Rises would not have a significant impact on its exporting strength.

UK real wages have fallen in recent years. Germany’s have risen.

According to the Institute for Employment Research, the research arm of the federal employment agency, 25% of all German workers earn less than €9.54 per hour.

For context, Ireland also has a high incidence of low pay and with the UK, the worst pension coverage in Europe for private sector workers.

Ireland also has the worst apprenticeship system in Western Europe.

Like low pay in Germany, it’s interesting how such issues can be remote for policy makers and others.

In the US, the real median household income in 2012 was at a 24-year low.

It’s really back to the tango – there are no short-term solutions.

There are certain factors that are required to have reasonable economic growth. If a country itself cannot mange to get its act together, it still has choices but none that are palatable.

@ MH

Your reply deals with points that are irrelevant to what I thought we were discussing. You quote the IMF chief in Germany as saying that “the German current account surplus is not the result of targeted policy measures” and seem to agree with him. I think that this is total rubbish, not just in relation to the overall suppression of wage levels – in effect, a technologically very advanced country trying to run a low-wage economy – but in relation to other areas such as energy.

What is significant, it seems to me, is that Merkel has dumped the FDP, indeed consigned it to history, the staunchest defender of the status quo in favour of, very possibly, the Greens. They are, at least, in agreement with her on the phasing out of nuclear energy.

Nothing is forever even catholic marriage. If the EZ is destroying the aspirations of people’s due to pettyfogging ideology, fear and greed, then it ought to be dismantled. Life goes on. Europe recovered from at least two disastrous attempts at domination by the same power. It will do so again. The EZ is only a currency. I am already on my third currency arrangement so a 4th will not be a problem. Might be a problem for hordes of euroquislimgs on the Brussels tab.


That is quite some nonsequitur you have there:

We must assume that we operate in a world populated by adults in the decision-making roles.

That is true but unimportant. Now if you replace the word “adult” with the words “competent and well informed people with the best interests of the public at heart” the sentence becomes false but important.

Apart from nobody being forced to buy German products, or run up unsustainable debts to enable them to do so, no country was ever forced to join the euro.

What is the collective noun for straw men?

No country ran up unsustainable debts to buy German goods (perhaps Greek military spending counts – something the Germans are still in favour of), but they did see a local hollowing out of industry and reduced government revenues because Germany mercantilism is so effective, a policy that is enabled by EMU.

As for no country being forced to join the Euro, well fair enough, but it is safe to say that countries has no idea how badly EMU would treat the smaller countries in a crisis.

How best to live with the resulting situation is the question.

There is a school of thought that suggests the first step to take when you realize you are doing something wrong is to stop doing it.

It seems the European right focuses more on the hope that if one continues with the wrong course of action for long enough eventually strong determination (and perhaps some fiscal rules) will make it work.

It is to laugh.

@ Colm McCarthy

As an addendum, one could say that the British and the Danes were awake to the implications of Maastricht.

This wiki link on Sweden is also informative.,_2003

Make of this what you will! My own view, given that the referendum was non-binding, is that the Swedish government failed in its treaty obligations. On the other hand, one could argue that the Swedes were also wide awake.


“You quote the IMF chief in Germany as saying that “the German current account surplus is not the result of targeted policy measures” and seem to agree with him. I think that this is total rubbish, not just in relation to the overall suppression of wage levels – in effect, a technologically very advanced country trying to run a low-wage economy – but in relation to other areas such as energy.”

Perhaps it would be more accurate to say that a combination of German targeted policy measures (on energy charges not wages) and superior “German mercantilism” are factors in understanding how other EU economies – and the US economy have been hollowed out.

But I think it is childish to attempt to blame Germanic Europe for being successful. Germany’s competitive strengths are transport/energy/environmental engineering and life sciences (i.e. products) which are evergreen businesses. Many Anglo countries preferred to outsource many of those those fields and build strengths in finance/insurance/real estate and PR/advertising/media/marketing (i.e. services). While there is an evolutionary hierarchy from commodity-based to product-based to service-based to experience-based economies, it is often forgotten that progression along this evolutionary S-curve is contingent to an extent on holding on to the earlier accomplishments. Germany is strong in commodities (e.g. food and energy) despite its focus on products and services. Much of the Anglo world abandoned those two earlier stages of accomplishment through outsourcing manufacture and redirecting capital into professional services. This has various unfortunate consequences:
1. Entropy sets in when whole layers of an economy to do with making tangible things are outsourced. It becomes increasingly difficult for surviving product-related businesses to survive as the supplier base decays or decamps.
2. It is more difficult to define and enforce intellectual property rights in professional services-related areas (e.g. data processing algorithms, organisational administration methods, medical procedures) than in areas with tangible technology (medical devices, materials, manufactured products) consequently copying and commoditisation is swifter.
3. In times of recession, economies experience evolution in reverse. People buy fewer high value services but are obliged to maintain spending on commodities and products. So in Ireland we see the ongoing evisceration of the indigenous FIRE and PAMM sectors of the economy while our relatively tiny food and product sectors are buoyant and internationally competitive.

Another point to consider in thinking about German economic dominance is their fear of the rising BRIC economies. German people know that over time ‘Western’ hourly wages will fall, as those in rising BRIC economies are rising. Their real battle is to oppose that trend, not to overwhelm weak and uncompetitive exporters such as the EU peripherals. German social solidarity meant that large employers there did not stampede either to embrace Chinese low wage manufacture (as happened in many Anglo countries, notably the US but including our own) nor to abandon the German tax environment to become global FDI tax arbitrage privateers.

The challenge to other EU states including ours is simple to state but increasingly hard to achieve: become economically relevant to other states and provide a sustainable, profitable, attractive place to build business. Jingoistic and inaccurate whinging in the FT and here about German wage containment glosses over these underlying issues. The US/UK/IRL zone needs to look seriously at the operation of politics, law and government in their economies and try and understand why they struggle to build durable economies.

Simon Wren-Lewis of Merton College, Oxford U
Look at where EZ is on the chart and try not to weep.

@ Tony Owens

I would have no fault with your analysis except for the bits that it leaves out, most notably (i) re-unification of Germany and (ii) enlargement of the EU to the countries of Eastern Europe which enabled Germany to recover her historic and geographical hinterland. German entrepreneurs reacted in the way in which one would expect and in a manner with which I have no difficulty whatsoever.

What I do have a difficulty with is “targeted policy meaures” to assist them in that endeavour e.g. making full use – with Austria – of the full seven year derogation negotiated with these countries with regard to free movement of labour.

If Germany wants to compete with China by running a US style employment policy, that is Germany’s choice. But it cannot hold itself up as an example for other countries to follow. Its own people will not stand for it in any case. That, and the fact that the country is locked into the euro whether it likes it or not, are the best hope for re-establishing a balanced economic development in Europe.

@ Tony Owens

It’s good to get feedback from the world of selling and exporting.

People seek to have simple explanations but it’s ridiculous to suggest that Germany operates a low-wage economy.

It doesn’t sell cheap or cheap products, using both meanings of the word.

Average real hourly pay rose by 30% in the period 1985-2010 compared with 6% in the US. Germany is among the European countries with public social spending above 30% of GDP, compared with 20% in the US.

There is a pattern where companies that are successful overseas and build plants there, reinforce success at home.

The trade surplus results from millions of interactions and common-sense suggests that a national minimum wage is not going to materially impact it.

France has a higher number in third level education and it does better than the dual-work-education system in Germany or Switzerland, Austria or Denmark?

In 2008-2012, Germany has outpaced the US and UK in gross fixed capital investment. In 2003-2007, it kept pace with the UK.

Christian Noyer, Banque de France governor, said last May that GDP in Germany “contracted almost twice as much as in France in 2009.” But Germany’s greater labour-market flexibility allowed for a much faster rebound.” France lost 500,000 jobs in that period, while German unemployment “remained stable,” in part because businesses could cut working hours when growth slowed.

Martin Wolf is correct in saying that every country cannot run a surplus but reforms to make it easier to start a business, reducing insider influence, promoting competition etc helps activity in a domestic economy.

The next in line in terms of size in the Eurozone: France has had a trade deficit every year since 2002; Italy’s economy stagnated for a decade and then contracted in recent years and Spain is back to pre-bubble times with high unemployment. Italy’s Ferrero Rocher Group at 86 of 250 global consumer goods companies, is the biggest Italian firm.

It’s ironic that it was France that pushed a reluctant Germany to agree to the euro project. France’s world export market share fell 20% and its Eurozone market share fell 9% between 2005-2010.

China has 10% of its workforce in the public sector compared with France’s 27%.

Until the 1990s, France was among Europe’s leading economies in per capita GDP. By 2010, however, the country had dropped to 11th out of the EU-15. Low labour force participation of older and young people, as well as high unemployment rates are the main drivers of this per capita GDP gap.

What should Germany do when services reform and a national minimum wage would not have a material impact on the trade surplus?

@ MH

You continue to marshal facts and comparisons which have no relevance to the case that I am making i.e. that German has by way of deliberate policy compressed wages over the past ten years relative to the other countries of the EA, often as part of deals with major unions to guarantee continued permanent employment in return for wage moderation. Wage increases have been negotiated, but against the background of a major increase in precarious and part-time employment among mainly non-skilled and non-unionised workers.

In response to pressure within Germany, this situation is now changing, and rapidly.

My reference to the US was intended – a point which I did not make sufficiently clear – to the unfair distribution of the economic gains that has resulted from this approach, a situation which is now also being remedied. The overall impact should see an increase in consumption in Germany and, ultimately a better external balance which may well also include continued expansion of German exports but offset by a higher level of imports.

It is against this background that I consider the article by Martin Wolf to be OTT.


It’s an interesting observation that German wages are now growing faster and have been doing so for the past two years. The “energy transformation” in Germany also has implications for competitiveness in the long run, since fundamentally it represents a shift to a higher cost of energy production from which industry cannot be shielded forever.

The liklihood is that we have already seen the high point of German relative competitveness, sometime before 2010.

“China has 10% of its workforce in the public sector compared with France’s 27%. ”

What is the significance , Michael? China has 50% peasants with no education.
The UK probably has a lower PS proportion than France because of privatisation. And so on.

the german wage growth is positive but certainly not phenomenal.
Quite frankly, I did expect at least 0.5% per anno more.

When some large countries have to do substantially less than 2.0% nominal (wage) inflation for some years, then some others, like us, have to do some more beyond 2.0, to arrive at a common average of <= 2.0% inflation.


I have presented non-German comparisons to show that Germany isn’t unique.

Spain has a much higher reliance on temp workers and South Korea is higher again.

The number of German workers employed on a temporary or part-time basis fell by about 146,00 people in 2012 to a total of 7.89m, according to Destatis, the federal statistics office, Meanwhile, the number of permanent jobs rose by about 504,000 to 24.2m, Destatis data showed.

In recent times, the rise in demand in emerging markets for Germany’s extensive portfolio of products has been the main reason for the continuing surge in exports.

The Americans love their cars!

The poor performance of France and Italy, reflects their own problems more than the German export machine.

I actually do think that the facts MH brings here, are relevant to the case discussed. Just with respect to his Tony Owens comments, Tony is into support services, centered around his personal qualities, not really scalable, but no so much about “selling and exporting”, or ….. ?

And I see the German election results actually as a very interesting opportunity to play on many things, like belgian non-government or “hessische Verhältnisse”

From a technical point of view, I really enjoy that the communists wasted no time to bring up the minimum wage as a perfect wedge issue. Sarah Wagenknecht and Katja Kipping (Dresden) are not stupid.

@ francis

A commenter on the Financial Times site also deals with the issue of scalability, and marginal cot:

A second problem is that MW’s economics are so 19th century. Scarcity of resources – above all capital – and all that jazz. Yet anyone who ever saw a modern manufacturing facility of any kind will know that the extra unit is virtually cost-free – requires no extra capital, no extra labour. Germany AG has many such facilities and no amount of consumption by German consumers will ever exhaust these facilities. On the other hand, why would such facilities turn away Johnny Foreigner when he comes knocking?

“As Mr Schäuble’s piece makes quite clear, demand does not appear in the analysis.” Well, foreign demand certainly does not seem to enter MR’s analysis either.

Francis with respect to my comments I would like to think that my professional background is of little relevance to their validity.

It seems to me that the equilibration of wage rates between the West and the BRIC’s is and will have transformative effects for all. Within that, the ‘winner takes all’ phenomenon that instant communication has accentuated means that specialisation and determined domination of a myriad of globalised markets is the name of the game. The ‘also rans’ get left with the crumbs. The committed behaviour of German companies suggests that they understand this dynamic. I find no fault with their actions.

I place little store on the actions of states themselves in their overall economic success or failure. They all closely compete with each other, each in their own way, to be worthy locations to domicile enterprises. The decisive factors are the wishes and perceptions of a constellation of proprietors and their professional advisors, not the actions of governments.

Tony and MH,

I did not mean to disparage your comments in any way.

I did and do raise my fist in support of your “manifesto”, not your wording, I know, but I like it, just like calling Schily my “police minister” : – )

In stark contrast to Maggies “there is no such thing as society” we believe here, that this is actually the constituting bed rock, and formal government more like just the icing on the cake.

@ Tony

“It seems to me that the equilibration of wage rates between the West and the BRIC’s is and will have transformative effects for all”.

I wouldn’t hold my breath for that. I worked in India for a few years and the salary differentials were very tightly managed. Locals complained often at office meetings that they weren’t treated as well as European employees. Multinationals vary their prices across countries according to what the local market will bear.
French prices are significantly lower than Swiss prices , for example. The same toothpaste is far cheaper in India than in Denmark. Cartels keep prices sticky in rich countries. Savings are not passed on to punters.

Clothes are another example. Cost of production is a fraction of the sale cost of upper end garments. People pay more for “exclusivity” even if the base product is not much different to something on sale for half the price down the road.

Labour cost savings often end up with rent seekers.

@ Seafoid

The wage equilibration has been underway for nearly two decades now. From the perspective of Westerners it started with wages for the unskilled and uneducated (manufacturing, retail, hospitality etc) and has gradually been eating its way up the education grades. (our research in 2009 of opinion and attitudes among recent graduates told us they regarded a MSc as the equivalent of a BSc 25 years earlier)

Wage equilibration is irrefutably illustrated by the consistently rising GDP graphs of the BRIC’s vs nearly flat GDP growth of ‘Western’ countries over the last 20 years. Jon Moynihan of PA provides compelling data on job and wage trends in a 2012 LSC masterclass here:

The ‘transformative effects’ I spoke of are well underway. Manufacturing and low-skilled admin jobs have been decimated by offshoring – and the remaining jobs must compete with a far lower cost floor. Moynihan spoke of an average industrial wage of around USD135/day in 2012 vs. around USD 15 – 25/day in Chinese or Indian second tier cities. I believe this erosion will continue, as developing country skill levels and competences rise (Embrauer, JCB India, Tata, Foxconn, Infosys, WiPro, Hauwei, LG, Samsung etc) while through accelerating offshoring and FDI by Western firms the corresponding skill levels and competences in Western countries just like our own will fall. The evidence of this is everywhere – ask any humble businessman who works in technology.

Germany is interesting because it appears to be bucking this trend to de-skilling and real wage decline. Perhaps, just perhaps, there are lessons for UK/IRL and the US in how they see such issues and how they respond?

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