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German economist Heiner Flassbeck - "Nothing explains inflation better than unit labor costs"

Ever wondered how inflation can be best explained? In this video, German economist Heiner Flassbeck argues that Germany’s persistent export surplus and unwillingness to increase wages has created an imbalance within the eurozone. Flassbeck gives insights about the state of the European economy, arguing that Germany’s focus on reducing government spending and maintaining low inflation has created an imbalance in the European Union, leading to economic difficulties in other member states.

“Nothing explains inflation better than unit labor costs”

— Heiner Flassbeck

Frequently Asked Questions (FAQ)

  1. What is the core issue driving the economic crisis in Europe? The root of the problem lies in Germany’s persistent pursuit of low wage growth and export surpluses since the early 2000s. This approach has led to a substantial increase in German competitiveness at the expense of other European countries, particularly those in Southern and Eastern Europe.

  2. How has Germany’s approach harmed other European countries? Germany’s suppressed wage growth and export-driven strategy resulted in other countries having to lower their wages and devalue their currencies to remain competitive. This, in turn, led to a loss of competitiveness, economic stagnation, and increased unemployment in those countries.

  3. What role do wage-price dynamics and inflation play in this crisis? Wage suppression in Germany kept inflation artificially low, hindering other countries from achieving the European Central Bank’s target inflation rate of 2%. This imbalance led to diverging inflation rates across the Eurozone, further destabilizing the economies of weaker countries.

  4. How has Germany’s economic policy violated EU rules? Germany’s persistent trade surpluses exceeding 6% of its GDP violate the EU’s macroeconomic imbalance procedure, which aims to prevent excessive imbalances within the Eurozone. However, no action has been taken against Germany for these violations.

  5. What is the connection between savings and debt in this context? Germany’s focus on saving and its aversion to debt have created a situation where other countries are forced to take on debt to compensate for the lack of demand caused by Germany’s economic policies. This has resulted in a debt crisis in Southern Europe, with countries like Italy and Greece struggling to manage their debt burdens.

  6. What is the role of the European Commission in addressing this crisis? The European Commission has initiated deficit procedures against countries like France and Italy, aiming to reduce their public debt. However, these measures are ineffective as long as Germany continues its export-driven policies, forcing other countries to take on debt.

  7. Is there a solution to this crisis? To resolve the crisis, Germany needs to shift away from its export-oriented model and encourage wage growth. This would create more domestic demand in Germany and allow other countries to regain competitiveness without resorting to wage cuts.

  8. What role can public investment play in resolving the crisis? Increased public investment in Germany and other European countries, even if financed through debt, could stimulate economic growth and address infrastructure gaps. This would be a more sustainable approach than relying solely on exports.

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