In short, the German economy has produced a characteristic macroeconomic performance throughout the period, marked by mediocre growth, high unemployment and low inflation. German performance has set the tone for the eurozone and placed its stamp on the operation of the euro. The sovereign debt crisis has its roots as much in the performance of Germany, as it does in the actions of peripheral countries.
Fig. 3 Inflation Rates (Harmonised Index of Consumer Prices)
Source: Eurostat
Investment and consumption
A closer look at the components of aggregate demand gives further insight into macroeconomic performance. Before looking at investment and consumption, however, note that the economies in the sample are generally service-based. The secondary sector contributes slightly less than 30 percent of GDP in Germany, Italy, Spain and Portugal. It amounts to roughly 45 percent of GDP in Ireland, but that is largely due to the presence of multinationals. Greece is also an exception, the secondary sector standing at about 20 percent of GDP – an aspect of persistent de-industrialisation since the 1980s. Agriculture makes a minor contribution to output in all eurozone countries.
Investment performance has been poor, with the exception of Spain and Ireland (fig. 4), both of which even underwent investment booms in the late 2000s. But Irish investment in the 1990s was in large part due to US multinational activities. Generally, there has not been a strong wave of investment in the eurozone.
Fig. 4 Gross Fixed Capital Formation (percent of GDP)
Source: Eurostat
Fig. 5 Gross Fixed Capital Formation Net of Housing (percent of GDP)
Source: Eurostat
A better picture of underlying trends is given by investment net of housing (fig. 5). It then becomes clear that the investment boom in Ireland in the 2000s was primarily due to a real estate bubble. The Spanish investment boom was also heavily based on real estate. Investment in the productive sector has been generally weak in all the countries considered.
Consumption, on the other hand, has remained pretty flat relative to GDP, with the exception of Portugal where it rose significantly after the introduction of the euro (fig. 6). The striking aspect of consumption, however, is the exceptionally high level of Greece, rapidly approached by Portugal in the second half of the 2000s. High household consumption has been the mode of integration for both countries in the eurozone. This is a significant difference with Spain and Italy, and has important implications for indebtedness, as is shown below. The other exception is Ireland, where private consumption has been a very low proportion of GDP.
The patterns of consumption are broadly reflected in saving (fig. 7). For both Greece and Portugal saving as a percentage of GDP became negative in the second half of the 2000s. Thus, high and rising consumption has been supported by rising household debt. However, saving has also declined in Spain, Italy, and even in Ireland in the 2000s. Households across the periphery have found it difficult to sustain consumption on current income. The exception is Germany, where saving rose in the second half of the 2000s, in line with weak consumption. German growth, such it has been in the 2000s, has come neither from investment nor from consumption, but from exports. Persistent pressures of stagnation, and even contraction, in the domestic German economy have been fundamental to the evolution of the euro, directly contributing to the sovereign debt crisis.
Fig. 6 Household Consumption (percent of GDP)
Source: Eurostat
Fig. 7 Saving (percent of GDP)
Source: Eurostat
Debt
Household debt has risen consistently across peripheral countries in the sample. Financialisation of individual worker incomes has proceeded apace among peripheral countries of the eurozone throughout the last two decades. Growth of debt has been driven by consumption but also by rising prices of real estate. Low interest rates in the 2000s, as the ECB applied the same monetary policy across the eurozone, allowed workers to increase indebtedness. In particular, Portugal, Spain and Ireland have approached ratios of household debt to GDP of around 100 percent (fig. 8). These are very high levels of debt that will be difficult to support if unemployment and interest rates rise in the near future.
Fig. 8 Household Liabilities (percent of GDP)
Source: Eurostat, CB and FSA of Ireland
The vital exception is again Germany, where household indebtedness has declined, in line with weak consumption and the absence of a housing bubble. While households in peripheral countries have been accumulating debt as part of the integration of these countries in the eurozone, German households have been reducing the relative burden of their debt. This contrast is an integral part of the differential response of eurozone countries to the shock of the crisis of 2007–9, contributing to the sovereign debt crisis.
Corporate debt, meanwhile, has not shown a tendency to rise significantly across the sample in the years following the introduction of the euro, with the exception of Spain and Ireland, the only countries in which investment also rose significantly during the period (fig. 9).
Fig. 9 Non-financial Corporation Liabilities (percent of GDP)
Source: Eurostat, CB and FSA of Ireland
Recapping, macroeconomic performance of peripheral countries relative to Germany has demonstrated considerable variation but also common patterns. At the core of the eurozone, Germany has been marked by low growth, flat investment, stagnant consumption, rising saving, and falling household debt. Germany has not been a dynamic capitalist economy on any score. The only source of dynamism has been exports, for reasons that will become clear below.
Confronted with the stagnant and export-oriented performance of the dominant country of the eurozone, peripheral countries have adopted a variety of approaches. Thus, Spain and Ireland have had investment booms that were based heavily on real estate speculation and bubbles. Greece and Portugal, meanwhile, have relied on high consumption, driven by household debt. Indeed, household debt has risen substantially across peripheral countries. Italy, finally, has been lodged in what could only be described as stagnation throughout this period.
Integration of peripheral countries into the eurozone, in other words, has been precarious. This is apparent in their export performance, which is the mirror image of German performance, as is shown below. It is also apparent in the patterns of household financialisation, which have moved in the opposite direction to Germany. These structural contrasts lie at the root of the current crisis. The evidence also shows that it is fallacious to interpret the crisis as the result of inefficient peripheral economies being unable to deal with the efficient German economy. It is the size of the German economy and its export performance – which has very specific causes attached to the euro – that have allowed it to dominate the eurozone. Efficiency has had little to do with it. Consider now the labour market in order fully to establish this point.
3. LABOUR REMUNERATION AND PRODUCTIVITY: A GENERAL SQUEEZE, BUT MORE EFFECTIVE IN GERMANY
A race to the bottom