from Follow the Money

Daniel Gross continues to say interesting things about the global economy

April 2, 2006

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Daniel Gross has noted one other way the US and continental Europe are more alike than different - corporate success hasn't translated into broad-based wage gains.    Corporate profits are rising relative to GDP in Germany and France, not just the US.   Gross: 

For example, median incomes for American workers have barely budged since 2000, while corporate profits have nearly doubled. In Germany, wages have fallen in real terms in the last two years, while earnings for the companies in the DAX 30 index have more than doubled. And in Germanyand much of the rest of Europe, the overall pace of economic growth has remained sluggish.

"All in all, the widespread prosperity of companies does not lead to prosperity for domestic economies or wage earners in Germany, France or Japan," wrote Patrick Artus, chief economist of IXIS, the Paris bank, in a recent report.

The other similarity between the US and Europe, of course, is the one that I noted on Friday - well illustrated by Daniel Gros (A European economist, not uber-economics journalist Daniel Gross):  current account deficits in Europe are closely correlated with rising housing prices.

Why has German economic performance lagged that of France as well as the US? Corporate profits are up in all three countries.  But housing prices are up in only the US and France.   And as a result, consumption growth/ demand growth has been relatively strong in the US and France, but not in Germany.  

Daniel Gross also notes - I think correctly - that so long as the gains of globalization are not broadly shared, it hardly should be a surprise that the political consensus that favors globalization is fraying.  He cites Stephen King of HSBC.

"When you have labor shares shrinking relative to capital shares, you tend to get a rise in economic nationalism, which is a democratic response to some of the effects of globalization," Mr. King said.

Daniel Gross's conclusion: get ready for more globalization a la carte.  I suspect Gross' forecast will prove to be even more prescient should housing prices stagnate, and capital gains fail to offset stagnant wages.

I also would be interested to know what Mr. King belives should be done, if anything   He doesn't seem to think China should change its peg, even theough China's intervention to keep the RMB (and Chinese wages, in dollar terms) down surely has contributed to the pressure on wages in the US and Europe and the fall in the RMB v. the euro since 2002 explains at least some of the profitability of European firms.   European imports from China certainly really started to pick up with the China started to intervene massively to drive the RMB down against the euro in 2002 and 2003  ... and even today, China resists pressure for the RMB to rise by more than the dollar against the euro.

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