...On 14 March Draghi made a presentation to heads of state and government on the economic situation in the euro area. His intent was to show the real reasons for the crisis and the counter-measures needed. In this he succeeded – although not in the way he intended.
Draghi presented two graphs that encapsulate his central argument: productivity growth in the surplus countries (Austria, Belgium, Germany, Luxembourg, Netherlands) was higher than in the deficit countries (France, Greece, Ireland, Italy, Portugal, Spain). But wage growth was much faster in the latter group. Structural reforms and wage moderation lead to success; structural rigidities and greedy trade unions lead to failure. QED.
According to the Frankfurter Allgemeine Zeitung, which reported the affair approvingly, the impact of Draghi’s intervention was devastating. François Hollande, the French president, who had earlier been calling for an end to austerity and for growth impulses, was, according to the newspaper, completely silenced after the ECB president had so clearly demonstrated, with incontrovertible evidence, what was wrong in Europe – or rather in certain countries in the eurozone – and what must be done.
Things are not as they seem, however. Draghi’s presentation contains a simple but fatal error – or should that be misrepresentation? ...
If Hollande had been aware of this, he need not have been silent at all. On the contrary, he could have pointed out that his country almost perfectly fits this benchmark: on Draghi’s chart, the gap for France is about 32%. Similarly, the figure of 28% would need to be subtracted from the supposed competitiveness gaps of the other deficit countries, substantially reducing – although not eliminating – them.
Moreover – and this is the key point – using the correct figures transforms Germany from the wage-productivity paragon, as portrayed by the central bank, into what it really is: a country that has systematically undershot the stability norm for balanced growth in a monetary union, and thus been a major contributing factor to the crisis.