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Wage Divergences in Euroland: Explosive in the Making

In: Euroland and the World Economy

Author

Listed:
  • Heiner Flassbeck

Abstract

The European Economic and Monetary Union (EMU) faces increased international and internal scrutiny. More and more observers are asking questions about the long-run viability of a monetary system with absolutely fixed nominal exchange rates, but dramatically divergent real exchange rates. Since the start of the Union in 1999 Germany, the biggest country and the European stronghold of external stability for several decades, has decoupled from many other member countries by keeping nominal and real wage growth far below the pace expected by the partner countries and the markets. Nominal unit labour costs are the surrogate of the real exchange rate in systems of absolutely fixed nominal exchange rates: rising divergences between Germany and the rest of EMU point to an unsustainable real depreciation of the German relative cost position in a system that has abandoned the use of the exchange rate as an instrument to compensate for such divergences.

Suggested Citation

  • Heiner Flassbeck, 2007. "Wage Divergences in Euroland: Explosive in the Making," Palgrave Macmillan Books, in: Jörg Bibow & Andrea Terzi (ed.), Euroland and the World Economy, chapter 2, pages 43-52, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-37755-4_3
    DOI: 10.1057/9780230377554_3
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    Citations

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    Cited by:

    1. Jörg Bibow, 2019. "20 years of the German euro are more than enough," Revista de Economía Crítica, Asociación de Economía Crítica, vol. 27, pages 32-46.
    2. Jörg Bibow, 2013. "Lost at Sea: The Euro Needs a Euro Treasury," IMK Studies 35-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    3. Dirk Ehnts & Michael Paetz, 2021. "COVID-19 and its economic consequences for the Euro Area," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 11(2), pages 227-249, June.
    4. Jorg Bibow, 2015. "The Euro's Savior? Assessing the ECB's Crisis Management Performance and Potential for Crisis Resolution," Economics Working Paper Archive wp_845, Levy Economics Institute.
    5. Argentino Pessoa, 2013. "Regional integration and the euro crisis: problems and solutions," ERSA conference papers ersa13p1153, European Regional Science Association.
    6. Andrea Terzi, 2010. "The "Keynesian Moment" in Policymaking, the Perils Ahead, and a Flow-of-funds Interpretation of Fiscal Policy," Economics Working Paper Archive wp_614, Levy Economics Institute.

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