Because of Greece the Germans have to Choose Higher Taxes and Austerity or Higher Unemployment and Austerity

Posted by PITHOCRATES - November 12th, 2011

Week in Review

As the Eurozone struggles to save the Euro there is but one country that can.  Germany.  They are the only ones rich enough to bail out anyone.  Some in the U.S. like to point to Germany as a success story for the social democracy system of government.  But there is a reason why Germany is the only one that can bail out the Eurozone.  And it’s not because of their generous pay and benefits (see Eurozone Crisis: Correcting Paul Krugman by Tim Worstall posted 11/6/2011 on Forbes).

Around the turn of the century Germany realised that it was becoming uncompetitive. Labour costs were getting too high for the productivity of that labour. So they determinedly turned the screws on labour costs. They deflated that part of the economy, driving down labour costs and up productivity.

Driving down labor costs?  Increasing productivity?  Why, that sounds like things we do on this side of the Atlantic.  Us evil capitalists.  Who believe prices are set by the market.  Not by the amount of labor it takes.  As Karl Marx said.

The Germans have learned that if your costs are too great you will price yourself out of the market.  So they cut their biggest cost.  Labor.  And now German exports are leading their economy.  Which is no doubt benefited by a weak Euro.  Thanks to the European sovereign debt crisis.

Which puts the Germans in a very unique position.  If Greece fails and drops out of the Euro the Euro will grow stronger.  Which will increase the cost of German exports.  Negating all their productivity gains.  So Germany needs to save Greece.  To keep the Euro weak.  And favorable to German exports.  The only question is will the German people go along and pay the taxes required to save the Euro?

The German taxpayer can’t win.  Either higher taxation and austerity.  Or greater unemployment and austerity.  All because Greece didn’t do what they did.  Turn the screws on their labor costs.

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