—— ABOUT CRISES —— Francesco Nicoli's ideas den

« L'Europe se fera dans les crises et elle sera la somme des solutions apportées à ces crises »—Jean Monnet

Inflation, Globalization, and the German Model

A very bothering feature of the European economic debate in these days is the recurring argument that Germans (and Germany as a state) would be against inflation because “of their history”. Of course, memories of Weimar’s hyperinflation plays a role in the diffused opposition against policies which may have an impact on inflation. In fact, even with inflation between 3 or 4% per year, we would be light-years away from hyperinflation and no risk of falling back there. It is argued , against the German perspective, that a 3% inflation in Germany would be very helpful for the Eurozone without hurting German economy; proposers of this thesis tend therefore to emphasize the “ill” nature of Germany’s interpretation of its own history and its own fear of inflation. There is, however, a much more serious reason for Germany’s opposition to inflation. History is relevant in shaping the system in a path-dependency fashion, but the reality is that the German economy and society as a whole are designed and optimized to work with low inflation. In this short blogpost, I try to reproduce a simplified version of the “German model”, building upon three main social groups: labour force, industrial sector, institutional system. Each of these groups “exchanges” certain services with the others; the ensuing flux diagram is reproduced in figure 1. All of the exchanges, or concessions, are greatly eased by to low inflation and price stability. Without price stability, the “German Model” (of institutions, politics, industrial relations) would simply collapse. Price stability is the fluid that allows circulation of “concessions” between institutions, labour force and industrial sector which reiterates a successful equilibrium.

german model

Price stability allows workers to accept (towards the industrial sector) a strong wage moderation, sometimes at a very competitive level such as the minijobs, as they can access cheap consumer goods and support from the welfare state; moreover, it grants consumption of quality foreign goods thanks to strong exchange rate. In exchange for wage moderation, the labour force obtains high domestic employment rates and a limited amount of delocalization of production. From the institutional system the labour force obtains, thanks to price stability, a reliable welfare state and economic support in front of wage moderation. In exchange, they provide continued support for mainstream parties and institutions, limiting social conflict.

Similarly, the industrial sector receives wage moderation from the labour force; it enjoys access to cheap capital and energy from abroad, which allows for high employment rate domestically thanks to wage moderation. In exchange for price stability, the industrial sector maintains its support for the institutional status quo, accepts higher levels of taxation (which finance welfare state and minijob support provisions) also limiting delocalizations.

Finally, the institutional sector receives votes from the labour force and taxation from the industrial sector, and in exchange provides support for minijobs, effective welfare state and functioning state-company interface, as well as a functioning infrastructure.

All of the above “exchanges”, or reciprocal concessions between social groups, are co-determined and possible only thanks to sustained and credible price stability; actual price stability, and the promise that price stability will not be abandoned.. Price stability constitutes the German response to globalization and thus far is a very successful response, which has forged a first-class society capable of standing tall in the middle of globalization’s storms. Still, the German social model is anchored to price stability, a fundamental as much as fragile cornerstone for its success. The widespread opposition for higher inflation rates Germany, even within the socialist party, should therefore not surprise, and neither shall it simply nor easily attributed to historical memory.

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This entry was posted on July 2, 2015 by in Economics and economies, Europe, OPINIONS, PROFESSIONAL.

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