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Germany to Blame for Euro Zone Crisis: Study

Tuesday, 28 May 2013 | 9:00 AM ET
Polish migrant workers harvest asparagus in Germany
Sean Gallup | Getty Images
Polish migrant workers harvest asparagus in Germany

Germany's insistence on keeping wage growth in check has given the country an unfair competitive advantage vis-à-vis its euro zone peers and is preventing troubled countries from returning to growth, a new study argues.

The report, published by the Rosa Luxemburg Foundation which is closely associated with Germany's socialist party Die Linke, says German unit labor costs - an important measure of productivity - have remained flat since the creation of the euro.

"With German unit labor costs undercutting those in the other countries by an increasing margin, its exports flourished and its imports slowed down," Heiner Flassbeck and Costas Lapavitsas, who authored the study,said.

They argue that by the end of the first decade of monetary union, the cost and price gap between Germany and southern Europe amounted to some 25 percent, and 15 percent between Germany and France.

(Read More: Germany Sees 'Revolution' if Welfare Model Scrapped)

"As a result of the accumulated gaps Germany has gained an absolute advantage in international trade, whereas the other countries have experienced an absolute disadvantage," they said.

"To illustrate this effect: a comparable product, which in 1999 had been sold at the same price in all EMU (European Monetary Union)member countries, could be sold by Germany in 2010 at a price that was 25 percent lower, on average, than in other EMU countries."

The report said the German government started putting enormous pressure on wage negotiations to improve the country's international competitiveness, inside and outside the euro zone, which helped its exports flourish.

"Since the start of monetary union in 1999, Germany, the biggest country and the European stronghold of external stability for several decades, decided to try out a new way of combating its high level of unemployment," the report said.

This attempt to tackle its persistent high unemployment rate was grounded in the conviction that lower wages would result in a more labor-intensive mode of production, it added.

But instead, the authors argue, it has resulted in "a huge gap in competitiveness."

Christian Noyer, the governor of France's central bank praised the German model in an interview with CNBC Tuesday, saying it had been an "inspiration" when looking at how to improve competitiveness.

(Read more: 'Recessions Hurt, but Austerity Kills': Study)

"The choice has been to look back at what Germany has done over the last decade. What they have done is indirectly reduce social levies imposed on wages and replace that through public financing by a small increase in VAT and indirect taxes. This is certainly a way to lighten the cost of labor and way to improve competiveness," said Noyer. He also argued that German wages were now slowly rising.

But the report disagrees with the view that improved competitiveness for Southern Europe, which is advocated by the likes of German Finance Minister Wolfgang Schaeuble, will offer a way out of the crisis for the euro zone.

"In this reasoning, a rejuvenation of the EU and a better future for all can be brought about when all countries that are now in crisis copy the German model," they said.

"'Structural reforms' aimed at lowering wages are bound to fail. If pursued in many countries simultaneously, the result of wage cuts willbe a dramatic drop in domestic demand in all these countries and a collapse of the trade flows between them."

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