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One paragraph that explains the hidden source of Europe's economic problems

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Over the long weekend, I read George Packer's magisterial profile of German Chancellor Angela Merkel and you should read it too if you haven't. At one point, Packer drops an observation about Merkel's worldview that explains an enormous amount about what's wrong with Europe today. But it goes by so fast you could easily miss it in the whirl of other stuff about Merkel's rise to power (emphasis added).

[Merkel] loves reading charts. In September, one of her senior aides showed me a stack of them that the Chancellor had just been examining; they showed the relative performance of different European economies across a variety of indicators. In unit-labor costs, he pointed out, Germany lies well below the euro-zone average. But the population of Germany—the largest of any nation in Europe—is stagnant and aging. "A country like that cannot run up more and more debt," the senior aide said.

The good news is that Germany's unit labor costs are low. The bad news is that the population isn't growing. But is it good to have such low unit labor costs?

Not really. What it means for unit labor costs to fall is that your country's wages grow slower than your country's labor productivity.

Now clearly if the opposite of that is happening, the trend is eventually going to become unsustainable. Only long-term productivity growth can support long-term wage growth. But endless wage stagnation is hardly an appealing recipe for economic success. And in Germany's case, it's become a problem for its neighbors as well. If Germans earned higher wages, they would buy more Spanish wine and French cheese and vacations in Italy and support employment growth in those countries. It ought to be a win-win for all of Europe.

But instead German's employers have managed to convince the country's politicians that wage suppression is something to brag about.

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