OPINION: Why the Euro will ultimately fail.

[bobalot]

Trouble is, once again, brewing in the eurozone, and politicians, journalist and bureaucrats are doing their best to provide commentary and solutions to the ongoing crisis. Yet it seems that very few understand the root of the problem.

This is an explanation of problem with the Euro, and the 2 possible solutions.

Imagine a German and a Spanish carpenter shop. In 1999 they both proudly present their new line of wooden chairs – the Spanish chair being made from Olive trees and the German one made by precision machinery. Both chairs are sold for €100. They’re both spectacular successes and all is well in both carpenter shops. But the Germans with their precision machinery are good at improving their production process. They buy better machines, they optimise their processes and they cut down on scrap wood. The Spanish aren’t quite as good at the productivity game, so their production process doesn’t improve as much. It seems Germans just have a knack for clever solutions that make the chair-building process better and faster.

Because the Spanish workers aren’t as good as the German at optimising chair-making their chairs become more expensive over time. Let’s say that in 1999 a worker could make a chair for €75, and the carpenter shop made a neat profit of €25 – whether it was German or Spanish. As you can see in the graph below in 2005 a German worker could still produce a chair for €75, while a Spanish worker could produce it for €75*1.15 = €86. The German carpenter shop still makes a neat profit of €25 per chair, while the Spanish shop now only makes €14. All because of those pesky Germans and their knack for being ever more productive. For the Spanish shop things will only get worse, and in 2008 they start losing money on the chairs when they sell them for €100 since their unit labour cost has shot up. They just can’t compete with the Germans. Note that this isn’t necessarily because the Spanish workers are lazy, it’s just that the Germans have better machines, infrastructure and processes at their disposal.



As you can also see in the graph this is a trend that reverberates around all the southern periphery of the Eurozone. Greece, Spain, Italy and Portugal are all in trouble because they can’t follow the German growth in productivity. Their carpenter shops go broke while the Spanish consumers start buying German chairs because they are cheaper. The German carpenters make boatloads of money because they sell lots of chairs to the Southern European countries whose carpenter shops have gone out of business because they can’t make chairs as cheaply as the Germans. They’re still slaving away at manual lathes while the Germans push buttons on a CNC machine.

Before the Euro the Spanish central bank would catch the problem early on and pull some monetary policy levers to make the country competitive again. They could print more money, change the intrest rate or devalue the peseta. With these tools it was possible to make Spanish goods cheaper for Germans and other foreigners. For example, when the peseta was devalued by 24.6% in 1977 a German exchanging his D-mark for Pesetas would get 24.6% more pesetas, and thus be able to buy more Spanish wooden chairs for his D-marks, making Spain competitive again. This works the other way too of course, so a German chair (or a Japanese television) would become more expensive, which usually isn’t popular with the people that vote. This is why devaluing is a weapon that is only used in a crisis situation. A more common way of regaining competitiveness is printing money which raises inflation.

Of course with the euro this isn’t an alternative. One euro is one euro, whether it’s in Spain or Germany. There is no Spanish Central bank to control Spanish monetary policy. There is only the European Central Bank that controls the Euro, and it has to follow a monetary policy that will work for both low growth countries and high growth countries.

So Spain was screwed. Businesses started going bankrupt, people were fired and tax revenues dwindled. This, of course was a double whammy since unemployed people not only don’t pay taxes, they also cost the state money in social services. So the southern countries started borrowing money, amongst others from Germany which had plenty of them since their chair-making business was doing rather well. Germany also had an interest in keeping the southern countries afloat since they were it’s main export market, so they gladly spewed money to the south. Money flowed from Spanish consumers buying German wooden chairs, and back to the Spanish in the form of loans that they could then use to buy even more wooden chairs. This worked well because investors that lent money to the Southern European countries knew that the Euro was a safe currency – it was backed by rock-solid Germany after all. The Germans felt rich because their exports were stellar, and the Spanish felt rich because they could borrow unlimited amount of money at low interest. Nobody seemed to realise the problem until the Euro crisis broke out in 2010. Then everyone seemed to notice – and panic – at the same time. Greek and Italian borrowing costs went through the roof, Spanish unemployment went straight up, and everyone blamed Greece, Italy and Spain for spending too much money. Which was of course only half truthful since Germany had been making boatloads of money from selling wooden chairs and audis to the Southern countries for more than ten years. Nobody seems to talk about that though, it’s much easier to just blame those lazy Greeks (who by the way have longer working hours than Germans).

In 2010 it was obvious that there was a divide between the North that had been gaining competitiveness and the south that had been losing competitiveness. As you would expect the southerne countries moved into deep recession, had massive debt and unemployment worse than during the great depression. Spain currently has unemployment levels exceeding 25% and youth unemployment of more than 50%. The Spanish carpenters can only stand and watch as the cheaper German chairs are imported.

This disaster was entirely avoidable if the Euro bureaucrats had bothered to read Robert Mundall and Marcus Flemming’s seminal paper from 1962 which stated that according to well established macro economic models it was impossible to have domestic fiscal autonomy, fixed exchange rates, and free capital flows: no more than two of those objectives could be met. They won the nobel prize in economics for this in 1992, so it’s not exactly an obscure crackpot theory.

Since the euro is, by definition, the currency used in the eurozone the exchange rates must be fixed. One euro in Greece is the same as one euro in Germany. The same goes for free capital flows, if you have one euro in Spain and can’t spend it in Germany the eurozone doesn’t make much sense. So if it has to work the Euro zone members must give up their fiscal autonomy. What does this mean?

Fiscal policy is how a country taxes and spends it’s money. Tax rates, social spending, VAT, healthcare spending and infrastructure spending are all parts of fiscal policy. It’s basically a nations budget. According to the the Mundell-Fleming model, as it’s called, the only way forward is fiscal integration. A united States of Europe. There has been some talk of this in Buxelles, but few voters realise what it actually means. A fiscal union means that a substantial part of taxing and spending will be done from a central authority in Bruxelles – the EU. This means a loss of sovereignty for individual nations in the euro, and it also means pemanent fiscal transfers between member states.

Fiscal transfers may sound innocent, but it is at its core an acceptance of the fact that countries like Greece and Spain are less competitive than Germany and need a permanent and continued handout of money every year to compensate for that. The Germans will need to pay the Greeks. Not once, not as a loan but as a steady flow of money year after year until Greece eventually becomes competitive. If they ever do. If trends reverse and Greek productivity starts to rise faster than German productivity the flow of money is reversed. Basically the rich countries pay for the poor.

This may sound preposterous, but it’s actually quite common. Every nation has poor rural areas that need to be subsidised. Far-outish-upon-Grandalf with 1000 inhabitants and a closed factory in the North of England just isn’t a good business for England. But the government still pays for social services, public pensions, roads and schools because the British voters accept that even though far-outish-upon-Grandalf is pretty screwed up, they are after all British and you can’t just throw the poor bastards out of the Commonwealth.

A better example is the United States. As the name implies it’s a collection of states, but they all consider themselves Americans first and New Yorkers, or South Carolinan’s second. They pay federal tax to the United States and state tax to New York or South Carolina. Because there is a strong social cohesion around being part of the greatest county on earth they accept that South Carolina is a piss-poor state that needs handouts from the federal government year after year. Last year South Carolina spent $2.34 for every $1 they collected in taxes. Courtesy of the federal government. The rich New Yorkers are OK with that because, hey they may be poor and not have a major league baseball team but they are Americans – just like us. We stand united! MURICA!

So if the Euro is to survive in its current form fiscal integration is a necessity. There’s just one problem. Those damned voters. European voters aren’t Europeans first and Germans second. They’re Germans or spaniards or Greeks that happen to be members of this euro-thing they don’t quite understand, but it means they don’t have to change to pesetas when they go on holiday in Spain so it’s probably a good thing. But none of them fly the European flag with pride from their homes like the Americans do. None of them proudly announce that they’re Europeans when they go abroad like Americans do, and none of them feel like they have much in common with people from other countries in the eurozone. They aren’t really Europeans, and there is no way German, Finnish or Belgian voters will accept yearly handouts counted in billions of euro to Spain, Portugal and Greece. They don’t even speak the same language. It’s just not going to happen. The social cohesion isn’t there.

The rhetoric of Angela Merkel captures the essence perfectly. “Those lazy euro-borrowing Greeks need to pay up. They also need to impose austerity, fire public workers, cut their budgets, spend less money and get their act together. Noway we’re going to pay for them” It’s pretty obvious that she, or maybe her voters, aren’t European enough to accept the fact that Greece will never be able to repay it’s debt, no matter how much they cut their spending. They’ve cut their spending by 25% since 2010, a staggering and unprecedented cut, but it isn’t enough for Germany. Because of the lacking growth in productivity it will never be enough. Meanwhile Greece is falling apart, a whole generation of youth is lost, poverty is rampant and Golden Dawn, a nazi party where half of the elected politicians are in jail for violent crimes, will likely rise to power at the next general elections if the current leader of the governing coalition Syriza doesn’t get a break.

It’s also a trend that has been repeatedly shown in referendums around the eurozone – when put to a national vote the voters tend to say no to the Euro and European union. Most famously when the Danes, to the surprise of everyone, voted no to joining the euro in 2000 even though almost all parties endorsed it. A second referendum has been on the drawing board ever since, but has never been held because the polls clearly show that the Danes will vote no again. There’s just no popular support for it.

It’s pretty obvious that the voting public of the Eurozone is lightyears away from considering themselves Europeans first. It’s just not going to happen. At least not within the foresseable future. There is noway the tides of public opinion can be swayed towards love of the union, especially not with the current crisis and accompanying finger pointing rhetoric used by almost all politicians. The Germans hate the Greeks because they can’t pay their loans, the Spanish hate the Finns because they impose ever more austerity on them, the Greeks hate the Germans because they think Merkel is trying to run their country. Everyone hate Cyprus because they do banking for Russian Oligarchs. It’s a total clusterfuck.

This leaves one last option.

A breakup of the Euro.

Source

The take away paragraph for me was:

This disaster was entirely avoidable if the Euro bureaucrats had bothered to read Robert Mundall and Marcus Flemming’s seminal paper from 1962 which stated that according to well established macro economic models it was impossible to have domestic fiscal autonomy, fixed exchange rates, and free capital flows: no more than two of those objectives could be met. They won the nobel prize in economics for this in 1992, so it’s not exactly an obscure crackpot theory.

Since the euro is, by definition, the currency used in the eurozone the exchange rates must be fixed. One euro in Greece is the same as one euro in Germany. The same goes for free capital flows, if you have one euro in Spain and can’t spend it in Germany the eurozone doesn’t make much sense. So if it has to work the Euro zone members must give up their fiscal autonomy.

Well, that's not going to happen.

[madd0ct0r]

It already has. This is what the meetings are for.

[Thanas]

It is a good article, but there are a few problems. First, one would assume Germany to be running a trade imbalance with the Eurozone. After all, every customer in Spain would buy cheap chairs from Germany while spanish chairs wouldn't sell in Germany, right? Well, no.

http://www.forbes.com/sites/raoulrupare ... e-surplus/

Germany does not run a surplus with the Eurozone
It is infuriating how few people know this and continue to discuss the topic without looking into the data. But as the chart below shows, Germany does not actually run a trade surplus with its Eurozone partners. In fact, since 2012 the monthly trade between Germany and the rest of the Eurozone has roughly been in balance.


This undermines one of Bernanke’s biggest gripes – that Germany is propagating “persistent imbalances” in the Eurozone. As the chart shows, the imbalance issue (at least in terms of trade) has been largely settled for the Eurozone and most of Germany’s significant surplus comes with other countries outside the Eurozone.

Of course, a key question underlying this is whether the adjustment is just cyclical (decline in imports of other countries) or structural (a boost to exports and permanent rebalancing). It is not entirely clear but there is evidence of both. In Greece, for example, it is clearly cyclical with imports collapsing. However, in Spain and Portugal there are signs that exports have grown. A further knock on question is whether the competitive gains which have driven these exports are themselves cyclical or structural (there is evidence of the former with labour costs coming down due to unemployment rather than wage cuts). These are questions which deserve more focus rather the German surplus alone.

But there is a follow on problem here as well. Due to this fact, those who argue for reducing Germany’s assumed surplus with the Eurozone are actually calling for it to begin running a deficit, and quite a large one in some cases. Some actively see this as a solution, but Bernanke actually does a good job of countering such an approach. This in fact would further engrain permanent imbalances. If Germany does start running a large deficit it risks engendering a cycle of boom and boost, imbalances via deficits and surpluses within the Eurozone. Such an approach is not a sustainable rebalancing. Of course, there will be countries that run surpluses and deficits depending on business cycles but we do not want to encourage a similar one sided approach as we saw in the first decade of the Eurozone.

The weaker euro is an important factor and it’s here to stay
Leading on from the above, since the trade surplus is largely with countries outside the Eurozone, one of the key factors is the weaker euro or more specifically that it is too weak for the German economy. While it has only weakened substantially recently (since May 2014) it has been too weak for Germany throughout the crisis. Bernanke does mention this but fails to really give it the relevance it deserves. It is of course crucial since there is little Germany can do to counter it and because the euro is only likely to get weaker due to the ECB’s looser monetary policy and bond buying.

Of course, often the same people who push for greater ECB action and a weaker euro are also critical of the German surplus without recognising that these positions are somewhat incoherent. The weaker euro looks here to stay and it is inevitable that Germany will be a big, if not the main, beneficiary.[...]Germany’s infrastructure could do with some updating while there is a strong case generally for economies to update infrastructure to keep pace with the changing nature of the economy (specifically here thinking on the digital side). It’s not clear though how this will help other Eurozone countries, other than by providing a boost to the overall figures for the Eurozone economy. It may reduce headline surplus by deploying some of the excess savings domestically but the impact is unlikely to be a game changer.

Increasing wages is a bit of a strange one, but is often wheeled out. Ultimately, increasing wages is not a decision made by the German government but by firms in their negotiations with workers. There has not been an active suppression in wages in Germany in recent years as some would have you believe. With a low growth and low inflation environment, wage growth will always be subdued. Furthermore, the cultural approach to wage bargaining is simply very different in Germany – overhauling this is no small feat. In the end though, wages are rising and should do further given that the economy is near full employment. Forcing such an issue risks entering the pattern explained above of one side of the Eurozone reflating while the other deflates and then switching following a crisis of some form.



As the chart above shows, Germany is basically operating at full capacity (it has almost no output gap). This means it is at its potential GDP so boosting spending for the sake of it seems a strange policy. [...]

The counter to this may be that while Germany is at near full employment and economic capacity, much of the Eurozone is not. But then this is not about Germany’s surplus, it is about how to move the bloc from looking at the national level to the Eurozone level. This will require a significant change in the institutions and the set-up of the Eurozone. Germany has shown a willingness to consider such changes, but rightly believes any changes must be accompanied by power sharing and greater economic oversight.

Ultimately, the German surplus has become a hot topic but is a bit of a red herring. Eurozone questions should focus on what the realistic path for democratically grounded integration is and whether the adjustments made so far are lasting or simply cyclical and temporary. The global imbalances debate is a worthy one (though not what Bernanke focuses on) but has to take account of the crucial role of currencies.

So to summarize - Germany is already running at near full capacity but still has an about even trade balance with the Eurozone. That means that Eurozone countries are selling as much to Germany as Germany is selling to other Eurozone countries.

So the point that the articles tries to claim - that German products are destroying the local economies - needs more proof. Right now it looks as if the products of other Euro nations find a good market in Germany.


Furthermore, and here is where the article gets wonky:
If you look at the actual trading balance between the nations, it is not as clear-cut a picture either. For example, while Germany runs a trade surplus with Greece (+ 3 226 760k) it also runs a negative trade balance with Ireland (- 3 412 977k EUR). While there are also trade surpluses with Portugal (+ 1 877 124k - note how that is about 40% of that of Greece) and Spain (+9 956 943k) they are less than those of other nations (cf: United States + 47 504 118k, United Kingdom + 41 714 009k,
France + 34 550 192k). None of those nations are in trouble.

Most striking: Austria sits at a whopping + 19 811 842k, which is more than the trade imbalance of Spain, Greece and Portugal put together. And yet Austria is working just fine. Furthermore, if those nations are in trouble due to German productivity, then that requires that Germany and those nations are direct competitors. I will need some evidence for this.

Even further, it is not like fiscal transfers are not already in place in the Eurozone. Since its accession to the EU, Greece has received from the European Union + 104 812 000k over what it has contributed. Since its accession to the EU, Germany has paid to the European Union 338 775 000k over what it has received. That means the trade imbalance is more than made up by the fiscal transfers already in place. (Source: http://money-go-round.eu/Year.aspx?year=0). The same is true for Portugal and Spain, who are the largest net beneficiaries (besides Poland). That means that the trade balance to Germany is more than offset by the fiscal transfers in place, at least in the case of Greece.

Now, the only area where the article might have a point is that the impossibility of devaluation hurts the export chances of Spain et al to other countries. Maybe in a general sense. But the only way where German productivity would hurt them would be if Spain and Germany were direct competitors in a lot of areas, for which I would need more information to believe. I am not an economist nor do I know the export tables by memory, but from what I remember it is not like Spain, Portugal, Greece and Germany are cornering the same markets or selling the same products. I mean, it is just as possible that the high German productivity should be beneficial to countries like Spain, for that means they can buy cheaper goods.

[Thanas]

With regards to Spain, it should also be noted that their economy is recovering (albeit unemployment is a large problem which the EU should help more with):

http://www.spiegel.de/international/eur ... 25327.html

It almost looks like the highly productive and stereotypically spotless Swabia region of Germany. So orderly. So accurate. One glassed-in company headquarters after the next. Only the park benches on the sidewalks betray the fact that Alcobendas is near Madrid, and not an industrial area near Stuttgart -- the sun shines more often here.

Mercedes Benz, which is based in Stuttgart, also has a base here. The Spanish branch of the company has its headquarters in Alcobendas. To get to the office of José Luis López-Schümmer, the president of Mercedes-Benz España, you need to walk behind a bulky SUV and head to the elevator. López, a bearded man of about 50, smiles contentedly. "Business is going well again," he says.

He has reason to be in a good mood. Mercedes van sales have already gone up by half over the past year: The cars are popular among Spanish small-business owners. In the first couple of months of this year, the number of car registrations went up by another 27 percent.

López is especially proud of the fact that over the past year his country has produced 2.4 million cars, and is leaving the traditional car-producing countries of Italy and France further and further behind. Only Germany produces more cars in Europe than Spain, albeit by a wide margin.

It was exports, and not domestic demand, that lifted Spain out of the worst economic crisis since the civil war in the 1930s. "Ninety percent of our Mercedes vans and trucks, which we produce in two plants in the Basque region, head outside of the country," López says.

The model being emulated by the country during its upturn is unmistakable. During the crisis, Spain copied the German economic model, successfully putting its emphasis on exports. In 2014, almost one third of Spanish goods and services were shipped outside of the country. 25,000 new jobs were created in the Spanish car factories of Opel, Seat, Renault, Ford and Nissan alone. Once the unions consented to making production more flexible, Mercedes invested €190 million ($208 million) in the factories. "We've been on the move," says López, who also once worked in Stuttgart.

Spain's Big Return

The European Central Bank is predicting that Spain will be one of the economic drivers of Europe in 2015. Powered by a cheap euro and low interest, economic growth is predicted to rise by 2.3 percent this year. The Spanish government is expecting one million additional jobs for 2014 and 2015.

Along with Portugal and Ireland, Spain represents an example of how an economic crisis can be turned into an opportunity. These countries' experiences show that a nation can recover its economic competitiveness through painful reform, even in a monetary union.

[ray245]

Does a lack of widely spoken language hinder any effort in helping the jobless rates? Unlike the US, there is far more difficulty in ensuring everyone speaks a common working language in all parts of the eurozone.

[LaCroix]

Does a lack of widely spoken language hinder any effort in helping the jobless rates? Unlike the US, there is far more difficulty in ensuring everyone speaks a common working language in all parts of the eurozone.

What lack? Practically everyone in the EU speaks English as second or third language.

[salm]

Google searches tell me that about 50% of Europeans do not speak English.
I could easily see how language could be problem for a lot of people seaking jobs in other countries.
Even if you speak English you will have better chances when applying for a job if you speak the countries native language. I know there a couple of companies where it is policy to speak English even if two, for example, Frenchmen speak with each other but that is the exception and not the rule.
Learning German is one key to get a job in Germany and I think it will stay like this for a while.

[ray245]

Does a lack of widely spoken language hinder any effort in helping the jobless rates? Unlike the US, there is far more difficulty in ensuring everyone speaks a common working language in all parts of the eurozone.

What lack? Practically everyone in the EU speaks English as second or third language.

That doesn't necessary mean they are fluent in it. It's highly unlikely that those that have difficulties finding jobs in their own countries are fluent in English. Even then, like what Salm was saying, not all available jobs in Europe use English as the working language.

[Welf]

It is a good article, but there are a few problems. First, one would assume Germany to be running a trade imbalance with the Eurozone. After all, every customer in Spain would buy cheap chairs from Germany while spanish chairs wouldn't sell in Germany, right? Well, no.

Spanish industries that competed directly with German ones would slowly go out of business over the years, so we wouldn't see direct competition. The problem for the Spaniards (and other periphery) countries was that the construction sector became to big. And that was because both other sectors became unprofitable and because German export surplus was directed back as cheap loans. Also, the bigger German export surpluses are, the stronger the Euro is, indirectly hurting PIIGS exports. The current political and economic focus on exporting is unhealthy in any case.
But I didn't know we already got rid of the trade imbalance within the eurozone.

Increasing wages is a bit of a strange one, but is often wheeled out. Ultimately, increasing wages is not a decision made by the German government but by firms in their negotiations with workers. There has not been an active suppression in wages in Germany in recent years as some would have you believe. With a low growth and low inflation environment, wage growth will always be subdued. Furthermore, the cultural approach to wage bargaining is simply very different in Germany – overhauling this is no small feat. In the end though, wages are rising and should do further given that the economy is near full employment. Forcing such an issue risks entering the pattern explained above of one side of the Eurozone reflating while the other deflates and then switching following a crisis of some form.

That paragraph is not correct. The labour market reforms from the early 2000s (a.k.a. Hartz IV) hurt worker bargaining position a lot and reduced real wages. A lot of people got fired and then got replaced by temporary staff, forcing wages down and creating pressure for unpaid overtime and more flexibility. Temporary staff and part-time jobs got privileged against full-time jobs leading to the destruction of the later.
And the sad thing: Since 2005 productivity growth actually went down. The analysts from Allianz wrote in 2013:

But the focus on this economic success, which has also earned Germany a great deal of
recognition on the international stage, makes it easy to overlook the fact that productiv-
ity growth in the German economy has continued to slacken. Whereas the increase in
labor productivity per person in work was still averaging 1.0% a year between 1995 and
2005, the average annual increase in the period between 2005 and 2012 was only 0.5%.
The slowdown in the pace of labor productivity growth, measured per hour worked, is
even more pronounced. The average growth rate of 1.6% between 1995 and 2005 had
slipped back to 0.9% between 2005 and 2012.
What is more, the average figures for the past seven years could actually be masking the
emergence of an even more unflattering labor productivity trend of late. Last year's trend
was more or less tantamount to a stagnation in productivity (-0,4% per person in work,
+0.4% per hour worked). In 2012, however, the slowdown in productivity growth was a
global phenomenon. The Conference Board found that global productivity per person in
work increased by only 1.8% in 2012 1 . With the exception of the 2008/09 recession, this is
the lowest rate of growth seen in the last ten years.

(The paper is full of bad news)

In other words, German success is almost completely the result of low wages.

Does a lack of widely spoken language hinder any effort in helping the jobless rates? Unlike the US, there is far more difficulty in ensuring everyone speaks a common working language in all parts of the eurozone.

What lack? Practically everyone in the EU speaks English as second or third language.

That doesn't necessary mean they are fluent in it. It's highly unlikely that those that have difficulties finding jobs in their own countries are fluent in English. Even then, like what Salm was saying, not all available jobs in Europe use English as the working language.

It's a problem, but a bit less that it seems. Those who can speak foreign languages fluently will be targeted by other countries, and if they leave they make room for those with lesser language skills. People with few customer contact like a brick layer or a cleaning worker only needs to understand his supervisor. It is still a barrier, but not an insurmountable one. The biggest issue is probably that you can't talk with other people after work. This effectively limits immigration to larger urban areas where it is more likely you find compatriots and people speaking multiple languages. In my hometown, a village/small city with less then 5.000 inhabitants a company hired some Spanish workers; from what I heard they integrated well into the job, but are deadly bored after the shift ends.

[Thanas]

It is a good article, but there are a few problems. First, one would assume Germany to be running a trade imbalance with the Eurozone. After all, every customer in Spain would buy cheap chairs from Germany while spanish chairs wouldn't sell in Germany, right? Well, no.

Spanish industries that competed directly with German ones would slowly go out of business over the years, so we wouldn't see direct competition.

Dude, that is the very definition of direct competition.

And that was because both other sectors became unprofitable and because German export surplus was directed back as cheap loans.

I don't get this. Could you explain how this process worked?

Also, the bigger German export surpluses are, the stronger the Euro is, indirectly hurting PIIGS exports.

OTOH, it should have helped countries who always imported more than exported.

[FTeik]

And the sad thing: Since 2005 productivity growth actually went down. The analysts from Allianz wrote in 2013:

But the focus on this economic success, which has also earned Germany a great deal of
recognition on the international stage, makes it easy to overlook the fact that productiv-
ity growth in the German economy has continued to slacken. Whereas the increase in
labor productivity per person in work was still averaging 1.0% a year between 1995 and
2005, the average annual increase in the period between 2005 and 2012 was only 0.5%.
The slowdown in the pace of labor productivity growth, measured per hour worked, is
even more pronounced. The average growth rate of 1.6% between 1995 and 2005 had
slipped back to 0.9% between 2005 and 2012.
What is more, the average figures for the past seven years could actually be masking the
emergence of an even more unflattering labor productivity trend of late. Last year's trend
was more or less tantamount to a stagnation in productivity (-0,4% per person in work,
+0.4% per hour worked). In 2012, however, the slowdown in productivity growth was a
global phenomenon. The Conference Board found that global productivity per person in
work increased by only 1.8% in 2012 1 . With the exception of the 2008/09 recession, this is
the lowest rate of growth seen in the last ten years.

(The paper is full of bad news)

In other words, German success is almost completely the result of low wages.

So there is still growth in productivity, but not as much as before? Can it be, that the german industry/workforce is reaching/has reached the peak of what a standard human's productivity would be? And that there won't be any massive growth anymore until processes are completely automated (including supervision and maintanance)?

[Irbis]

So there is still growth in productivity, but not as much as before?

Growth in this case is relative. If you grow slower than others, you're in fact falling behind.

Can it be, that the german industry/workforce is reaching/has reached the peak of what a standard human's productivity would be? And that there won't be any massive growth anymore until processes are completely automated (including supervision and maintanance)?

If I were to bet, I'd say you just can't extract as much from lower paid, less qualified people. Case in point - if you look at recruitment points in Central European states, you will see a lot of offers in German, for (almost always) lowest wage such post would pay in Germany. Such people, while working hard and well educated, are often only trained in older equipment and work processes making them less efficient.

They also serve as tool pressing wage growth down, because if you can have Polish electrician or Czech decker for half pay of native worker, you have a much stronger hand when negotiating with your own people. Both, however, only serve to line the owner's pockets and do little to mobilize and improve your own workforce.

Dude, that is the very definition of direct competition.

Uh, no. The competition in Eurozone is a bit different - because you can't adjust currency or market barriers. Even if your industry did well before 1999, it could have went out of business in next few years and today both countries seemingly wouldn't be competing anymore as relevant industries died already. Thus, your demand won't be possible to fulfill but it will be caused directly by German pressure.

OTOH, it should have helped countries who always imported more than exported.

If you import too much, your currency weakens, making exports more competitive. German exports, however, block Euro from weakening to large degree, making the situation worse for importers. Conversely, if you export too much, your currency strengthens, making imports more competitive. With Euro, Germans can effectively 'cheat' that as quantitative easing by ECB and southern Eurozone countries both weaken Euro instead. Would Germany be in as good shape with much less competitive economy? If not, that is direct economic transfer that should be acknowledged, too.

So the point that the articles tries to claim - that German products are destroying the local economies - needs more proof. Right now it looks as if the products of other Euro nations find a good market in Germany.

But what are these products? If they are semi-finished goods that are then put together in German factories and exported outside the Eurozone, then all of value added stays in Germany, not helping these countries much. On top of my head, Slovakia, closest Eurozone country to me, had recently big investments from foreign factories making parts to cars, engines and hand power tools thanks to their cheap labour, but nothing of that is even remotely finished product that can be sold on its own.

To really make that claim, you'd need to check the export structure and see who pockets profits.

Since its accession to the EU, Germany has paid to the European Union 338 775 000k over what it has received. That means the trade imbalance is more than made up by the fiscal transfers already in place. (Source: http://money-go-round.eu/Year.aspx?year=0). The same is true for Portugal and Spain, who are the largest net beneficiaries (besides Poland). That means that the trade balance to Germany is more than offset by the fiscal transfers in place, at least in the case of Greece.

What kind of fiscal transfers? You need to answer that. Because, at least in case of Poland, most of that are targeted transfers, something that can only be spent on narrowly defined stuff, and needs 25 to 50% of self funding. Thus, if your economy can't provide self funding, you lose the money. Even if it can, the stuff you can purchase often exceeds the capability of local economy and needs purchases in (surprise surprise) industrial centres in the West to fulfil.

First case I can think of - EU railroad modernization grant for improvement of intra-EU goods movement. Guess where we bought half of rails and train cars Polish factories couldn't make in time before grant deadline was closed? Yes, Austria/Germany. So, I would be very cautious claiming these transfers help the local economies and absolutely not the ones who seemingly pay them...

[His Divine Shadow]

I can tell you at this point I wish Finland had never joined the euro either. Shoulda done like all the other nordic countries and kept our own.