Help the euro: Pay German workers more
After Greece’s orderly default last Friday, and with the European Central Bank’s programs to add liquidity operating in the background, the Eurozone crisis has subsided, at least temporarily. In my view, this is a chance to look at ways to stabilize core systemic imbalances.
Always on the lookout for excitement, market participants have started to doubt Portugal. Also Spain, whose official debt numbers are questioned and which just announced that it will not be able to fulfill its 2012 deficit target, has spread some nervousness. Nevertheless, the euro crisis should leave the spotlight of investor worry for now. In fact, the equity rally which started twelve weeks ago continued, and even accelerated in the last couple of days.
Of course the euro crisis is not over. We have stated many times that current remedies doctor the symptoms (high and unsustainable public debts), but not the Eurozone’s fundamental malaise of a lack of competitiveness of peripheral countries compared with the core – especially Germany. Since the euro’s introduction in 1999, German competitiveness bounded ahead compared with the European periphery.
In the first eight years of the euro, German wages almost stagnated, while Italian and Spanish wages increased. At the same time, German labor productivity moved ahead much faster than average European productivity. Hence, German unit labor costs (roughly wages corrected by labor productivity) decreased compared with Southern Europe.
Measured by this indicator, the difference in competitiveness is a gap of over 30%, built up in the last twelve years. To close it, one strategy would be to lower the unit labor costs in the periphery, which is actually happening, as Greeks and Spaniards are now confronted with wage and income decreases, as part of the austerity plans imposed upon them. This strategy has the downside of pushing those countries into deep recessions (in Greece we can even speak of a depression), which ultimately exacerbate their public debt issues.
Christine Lagarde, the current IMF head and former French finance minister at the beginning of the crisis in 2010, hinted then at an alternative remedy to the imbalances within Europe on a visit to Germany. Instead of being stingy, she suggested, the Germans should boost their private consumption. German politicians derided her comments as typical French dirigisme, but in my opinion, Ms. Lagarde’s remarks go in the right direction.
Closing the competitiveness gap can mean lowering the unit labor costs of the European periphery, but it can also be done by increasing the unit labor costs in Germany. This is exactly what wage and income increases there would actually provoke.
Helping to solve the fundamental problem of the euro could therefore also be a good argument for the German trade unions, which are now demanding pay raises (up to 6.5% for the public sector) and threatening to strike by the end of the month. German employers will argue that increasing wages in Germany could jeopardize its trade surplus. But this same trade surplus is yet another indicator of the imbalances which have been built in the Eurozone over the last decade.
Within the Eurozone, German wage negotiations are more than just a fight between workers and employers, they are at the core of any long-term resolution of the euro crisis.