The German Economics of Chicken Foot SoupBy
Inge used to hate it when I wasted anything. She put an egg timer in the shower to make sure hot water didn’t disappear. She brought home a winter coat for me from the Red Cross, where she volunteered. If ever I said anything about lunch, she would remind me that she, a young girl from a refugee family in central Germany during the lean years after the World War II, used to have to comb trash heaps to find the ingredients for chicken foot soup.
Inge hosted me as an exchange student in Germany 20 years ago, opening her house for a year in the absurdly idyllic village of Eschershausen and getting up in the dark to make sure I had breakfast before school. She passed away two years ago, but I’ve been thinking of her this month, as I read about the fight between Chancellor Angela Merkel’s government and the U.S. Treasury Department, or Merkel and the European Commission over the country’s trade surplus. I keep thinking that Inge and I would probably be arguing about it, as we did about the egg timer.
Last week Germany’s Sachverständigenrat released its 50th annual report. The body is a little like the Council of Economic Advisers in the U.S., but in Germany, members are appointed to five-year terms by Germany’s largely ceremonial president, based on suggestions from the ruling coalition. A report from the Sachverständigenrat, rather than reflecting Merkel’s wishes, is supposed to show what the profession of economics understands to be true. It is the view from Germany, and this year it bears the title “Against a Backward-Looking Economic Policy.”
Germany’s economy is doing well, the report opens, particularly relative to the periphery of the euro zone. But this shouldn’t be taken for granted. After passing domestic welfare and labor reforms in 2003, German political parties argued during this year’s elections over which reforms to unwind.
This, wrote the Sachverständigenrat, will not do. Forward-looking economics does not kick tough problems, such as a coming wave of German retirees, into the future; forward-looking economics creates a crisis-proof economic structure that will serve as a “role model” for the rest of the euro zone. ”Only when Germany’s federal government does the right thing in taking responsibility for itself,” the report reads, “will it be able to convince other governments in Europe to take on their own national responsibilities and bring about the necessary reforms.”
Essentially, according to its own council of economic experts, the German government is in danger of becoming too soft with its own people—and so runs the danger of signaling to the rest of the euro zone that soft is acceptable. Unemployment in Spain lies at 26 percent; in Germany, it’s at 7 percent. The prescription for both remains the same.
This seems crazy, but then I think of Inge and remember that she was not crazy. Her view of the world was painted with the same colors as what the Sachverständigenrat published last week. Hard work and sacrifice have always worked in the past. There is no reason to doubt them now. Germans look to their own sacrifices—some from the 1950s, many from the last two decades—and believe they aren’t telling anyone to do anything they haven’t had to do themselves.
If you are unhappy, then let me tell you what chicken foot soup tastes like.
To understand the German approach to macroeconomics, says Martin Hellwig, you need to understand how surprisingly little wealth German households have. Hellwig, a director at the Max Planck Institute for Research on Collective Goods who publishes extensively on finance and macroeconomics, points to a study from April on household finances in the euro zone. Median wealth for a German household stands at €51,000 ($68,870), the lowest in the euro zone. For Greece, €102,000. For Spain, €183,000.
Hellwig suggests several reasons for this. German law and postwar public housing programs have discouraged home ownership, depressing wealth in the country. (Even German homeowners’ wealth merely approximates that of homeowners in Spain.) German retirement savings are locked up in pension annuities, which were not counted in the report.
And, says Hellwig, the low wealth number “may be due to wealth destruction in the war.” Wealth accumulates through generations, but Inge walked from the east with her mother and siblings with only as much wealth as she could carry—literally, in a rucksack. In her albums were sepia pictures of the estate her family had owned in Prussia, but she passed on to her children only the value of a small house she built with her husband when both started from scratch after the war. One of the great secrets of public and private life in Germany, seldom spoken but always known, is that during the war Germans suffered, too.
The German economy is hard to get around in Europe, by simple virtue of its size. This would make it seem “rich.” German families hold 24 percent of the household wealth in the euro zone. But they do not feel wealthy. I ask Hellwig, via telephone to Bonn, whether that makes futile the call from the U.S. Treasury for more German spending on consumption. “Yes,” he says. I think of the egg timer in the shower in Inge’s little house.
Since the war, Germany’s governments have also consistently succeeded in keeping wages down to make the country’s exports cheaper. ECB data rank median income for Germany at fifth in the euro zone. This lever—keep wages from rising, encourage exports—has always worked for Germany. It has bred not resentment in the country, but pride. And it has helped elevate one measure of economic value that has become a focus for German economists—and for the Sachverständigenrat in particular: competitiveness.
This year’s annual report spends several pages on just how hard competitiveness is to measure. Most generally it refers to how difficult or expensive it is to produce goods in a country. Normally, an exchange rate can reflect differences in competitiveness, but the lack of an exchange rate within the euro zone makes this trickier to measure. The European Central Bank measures relative change in production costs from a baseline of 100 percent in 1999, before the introduction of the euro. On this measure, Germany has dropped its costs down to 92 percent, relative to 14 years ago. Spain has raised its production costs to 110 percent of where they were.
Competitiveness is not just a function of wages, but of a country’s legal environment. In 2003, when all that German saving was headed out of the country to the rest of the booming euro zone, Germany’s then-center-left coalition undertook a series of painful labor and welfare reforms, making it easier to bring on part-time workers. Forget Germany’s post-war austerity; the country can point proudly to a recent record of thrift and sacrifice.
This is the program Germany is urging on the rest of Europe. The Sachverständigenrat can, with some justification, see the country as a role model. But these measures are relative, not absolute. A country can become less competitive because it is awarding its workers too much in wages or legal protection. Or it can become less competitive because it’s catching up. To use one exaggerated example, Estonia, a model of austerity, has become 25 percent less competitive, according to the ECB. But 25 years ago, Estonia was Soviet-occupied, hungrily watching TV broadcasts from Finland. It has a lot of catching up to do.
Despite Germany’s success in keeping wages down, the country’s households still earn much more money, in absolute terms, than families in the euro zone economies for which it sees itself as a model. The median German household earned €33,000 a year in 2010. In Spain in 2008 (the last year for which the ECB has numbers), the median household earned €25,000. In Portugal, that’s €15,000. At its worst in 2006, Germany saw unemployment of 12 percent. Unemployment in Spain has been above 12 percent for all but five of the last 20 years; only once has it briefly dipped lower than 8 percent.
The memory of sacrifice and wage reform in Germany is both recent and real. It is also relative and out of scale with the economic suffering that parts of the euro zone are seeing now. To stay competitive, Germany kept its wages stagnant for several periods during the second half of the 20th century. It is asking other countries now to drop wages, all at once, to do the same.
And to regain its competitiveness when its own unemployment hit 12 percent, Germany reformed its labor markets, a step that the euro zone’s periphery—and even France—need to take. But Germany is now asking for labor reform and wage cuts together, when Spain’s unemployment has topped out at around 26 percent. It’s not hard to see why Germany feels it has the moral standing to prescribe medicine it has taken itself. It’s also not hard to understand how Spaniards might feel when they read the prescription pad.
Inge and I never got to talk about Spain. (She communicated profoundly, after the trauma of Sept. 11, 2001, on how important it had been to her for her children never to have seen a war.) I did travel with her to the then-only recently reunified eastern part of Germany in 1992. She asked a shopkeeper how things were going. “Because it’s important,” she said, “that you do well over here.” This was sincere, but it also landed wrong with the shopkeeper. “We worked hard and did well,” was the thought. “We only want the same for you.”