Foucault and his Bla-Blas meet Germany

The conventional wisdom regarding the Eurozone economy runs something like the conventional wisdom regarding all things in the 50-and-over category. Muscles and nerves do begin to suffer the all too notorious signs of age.
The specifics upon which the CW rests: In Europe the obstinate rigidity of vested interests imposes itself insurmountable as a barrier to progress. Her costly welfare-state, high labor costs, sky-high tax-rates and monstrous bureaucratic red tape, seriously affect her ability to face two specific challenges: those derived from a rapidly aging population and those derived from globalization.
This is all quite true, but Macarena finds the endless digression on the part of the structurally pessimistic and the chic-skeptics quite boring and extremely pointless. They have said nothing new in years and have not been able to convince anybody to actually go ahead and…… do it, as Michael Jordan used to say.
At a younger age, she used to feel the same way about this now-prehistoric band of guys ---Foucault and his bla-blas--- whom she was inhumanely forced into reading.
Anyway, rather than insist on the largely-obvious, it seem interesting to reflect about one very significant caveat that is in order. Let us run through a few facts.
First, wage restraint has been a very important part of the recent German story, and by “recent” I don’t mean a year or two, but a decade or so. In cumulative terms, relative (nominal) wages in the rest of the Eurozone have increased by 8.5% with respect to Germany, while relative consumer prices have increased by about 6%.
Secondly, and this not surprising, since 1999, Germany’s exports, measured in terms of volume, have increased by more than 50%. The runner-up in Europe, Macarena is happy to say, is Spain where the increase is under 30%.
Thirdly, Germany outperformed the region in 2006 and any reasonable assessment must attribute much of this to productivity gains. After all, everybody did experience the same global cycle, eh?. 2007, on the other hand, has begun quite well, thank you very much. The Federal Statistics Office estimated Q4 growth at 3.7%, led by a continued surge in investment, while unemployment continued to fall in 07QI.
Fourth, perhaps more importantly, Germany is in the midst of the most interesting and dynamic economic reform debate in any advanced economy. A tax package that includes a significant 3-point increase in the VAT (from 16% to 19%), is in place since January, and the cabinet has given the go-ahead for a significant reduction in the corporate tax, from 38.5% to under 30%, expectations are that it will clear the Congress by July.
Of course, one must bear in mind a thing or two.
A thing: Hourly labor costs, at around €30, are still among the highest in the world and generate what Hans Werner Sinn has interestingly termed “Bazaar Economy” effect: value added by the booming export sector is rising by less than exports as a whole, as value-generating jobs all along the productive process that ultimately lead to an export item are outsourced to countries like Poland, where hourly labor costs are €5 instead of €30. There is little doubt that failing to push forward the de-facto labor reform taking place during the last decade, let alone reversing it, would be a terrible blow.
Likewise, the corporate tax reform still has to undergo congressional debate and observers, interested in the likely effect on future investment, must keep an eye on the outcome regarding the effective marginal corporate rate, rather than the headline-grabbing nominal rate. The elimination of interest-payment deductions not only compensates the favorable competitiveness effect of the rate reduction, but can also distort investment-financing decisions in dangerous ways.
Bottom line: Europe has been deservedly criticized for her economic complacency and rigidity, a troubling burden to carry when you have a lot of debt, when you are aging, and when you are part of an increasingly integrated world.
Germany has, for the last ten years, and increasingly so, lived a reform process, notably in the labor market but also in other areas, which gives ample reason to conclude that, even at 50, and despite the aches, the pains, and the delayed gratification, it is not too late for anything. Rather than mock the still-prominent tummy of a determined and disciplined middle-ager, who began to work out at 40, we should be figuring out ways to convince the truly sclerotic to throw out all the Foucault bla-bla band-type nonsense, get out there, and…… do the same.