Has EMU Made Germany Worse-Off? Monetary Aggregates, Fiscal and Wage Policy in the New Regime

This paper analyzes the impact of Economic and Monetary Union (EMU) on the German economy and argues that the regime change that came with European monetary unification has been more dramatic in this country than in the rest of the eurozone, leaving the country relatively worse-off than its partners. While EMU's fiscal framework is often identified as one of Germany's worst enemies, I suggest that it is not much this framework but rather the loss of monetary sovereignty which explains the country's below-average performance. EMU's one-size-fits-all monetary policy negatively affects the German economy in two ways. First, real monetary conditions are more restrictive in this country than in other member states because the country's inflation rate remains below the eurozone average in a situation in which the European Central Bank (ECB) sets interest rates based on aggregate price levels of the euro area as a whole. Second, EMU has disrupted the previously well-functioning coordination game between German wage bargainers and monetary authorities, leading to more rather than less wage restraint. This situation has arisen because national unions believe they might be capable of influencing price levels in EMU given the size of the economy they represent. Excessive wage restraint with its dampening effect on private consumption is thus an inheritance of EMU, even if not exclusively