Economics and politics - comment and analysis
4. March 2013 I Heiner Flassbeck I Economic Theory

Sorry to say it again, but Paul Krugman has to adopt a new inflation theory

In a recent blog posting Paul Krugman tried to answer the question whether there had been excessive German unit labour cost growth before EMU and whether a potentially necessary correction for that took place since 1999. I did not fully understand his answer but the question brings back an old argument used frequently by the ECB and the EU commissio…

In a recent blog posting Paul Krugman tried to answer the question whether there had been excessive German unit labour cost growth before EMU and whether a potentially necessary correction for that took place since 1999. I did not fully understand his answer but the question brings back an old argument used frequently by the ECB and the EU commission before the crisis to justify the gap that had emerged between Germany and the rest of EMU in the first  years of EMU.

The simple and straightforward answer to that question is: If German would have accumulated absolute disadvantages before EMU and would have compensated these by wage moderation during the first ten years of EMU it would not have ended up with absolute advantages as evidenced by huge current account surpluses and huge gains in market shares. Germany had a deficit on its current account balance after the reunification, which was due to a deficit of something like 50 percent of GDP in the eastern part. The surplus it records today of more than 6 percent of GDP is clearly associated with EMU.

The more sophisticated version of the answer is that Germany was the anchor of the system (the countr…

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