We saw in the first part that both hardliners are in big trouble, even though they started from very different positions. Netherlands indeed managed to increase its surplus position in foreign trade again, but its domestic economic weaknesses are striking and Finland lost its surplus position and also faces great pressure domestically.

Why is that? Which bad decisions have been made in the past that explain the present day dilemma? These are the questions that we will answer in the second part of this article.

In Figure 1, we approach the ‘nominal’ side of economic development from the rate of inflation. Compared to Germany and Belgium, both countries show similar developments (here in growth rates over the previous year). Although both countries showed one or even two peaks in the 2000s compared to Germany, the rates now approximate Germany’s evolution.

Figure 1

As for the determinants of inflation, in first instance wage evolution, significant differences are to be observed. The nominal hourly wage (index 1999 = 100) increased in Finland and the Netherlands since 1999 substantially more than in Germany (see Figure 2).

Figure 2

By 2007, wage moderation in Germany had become extreme. All other countries were suffering because of it and none did follow suit. Even Belgium, which traditionally always follows German wage agreements (Belgium even had laws which prescribed this to the social partners), did not go as far as Germany, where the rise of hourly wages grinded to a halt. Finland implemented significant wage increases.

For what concerns real wages, Finland hit a peak. It was the only country doing so (see Figure 3). Belgium and the Netherlands stayed close to Germany. In Germany, as a large economy, domestic prices reacted more strongly to the wage moderation, so that the real decline was less felt.

Figure 3

In terms of productivity, the three countries developed quite similarly. Finland was catching up. Its productivity rose quite strongly until 2007, but weakened considerably after it.

Figure 4

Figure 4 combines the evolution of nominal wages and of productivity and clearly shows the development of unit labour costs (see Figure 5). This figure reveals the core of the economic problems in Europe. All three countries have been losing massively in terms of competitiveness against Germany since the start of the European Monetary Union. Even today, the gap which has been accumulating for years still amounts to 15 percent for Belgium to 20 percent for Finland.

Figure 5

The combined evolution of real wages and productivity in the so-called real wage position (a sort of wage share calculated per hour worked) shows how particular the German evolution has been, even compared to countries that were once on a similar path of development (see Figure 6). Only in Germany did real wages, since the beginning of the monetary union, lag productivity gains.

Figure 6

 Conclusions

Figures 5 and 6 show clearly where the problem of the two countries lies (the same holds for Belgium). Despite its high current account surpluses, even the Netherlands fell far behind Germany in terms of competitiveness. Although the Netherlands certainly still profit from earlier stages of undervaluation because of their wage moderation, it seems that according to Dutch policy-makers the gap with Germany can only be narrowed by tightening belts even more.   The same applies to Finland, where both nominal and real wages continued to rise at a time when the evolution of productivity no longer justified this. Finland has by now definitely lost the benefits that it obtained from the depreciation of its currency early 1990s. To the minds of the hardliners, the only possible remaining policy option in the two countries (and in Belgium as well) consists of putting more pressure on wages, or, as is Finland’s intention, even to reduce real wages.  So far, this is not clearly visible in the figures, because the data on working hours in 2015 are not yet available, so no hourly wages can be calculated.   However, the European Commission expects nominal wages (per capita) to increase by only 0.3 percent in 2015 and by 2.1 percent in 2016 in the Netherlands (see here). For Finland, the figures are respectively 1.2 and 1.3 percent (and for Belgium respectively 0.5 and 0.4 percent). The result will be the same as the outcome in Greece that no one wants to admit: domestic demand is collapsing. As long as there is no corrective action from the side of fiscal policy, there will be no recovery, but only continued deflation and stagnation or recession.  The problem is that such corrective action cannot take place because it goes against the dogma of the poor state and the ‘virtue of thrift.’ And so the populations of countries where the hardliners are in power suffer the consequences of senseless policies. It also shows that these governments firmly believe in their nonsensical dogma, otherwise they would not implement such utter destructive and counterproductive policies.