The German wage issue
A great idea can suddenly sound ridiculous when expressed by the wrong person or institution. This is what came to mind after hearing the recent call by the German Bundesbank (BuBa) and the European Central Bank (ECB) for German employers to raise wages by 3% in their ongoing annual negotiations with their workers.
The plea was made first by BuBa Chief Economist Jens Ulbrich. He was followed by ECB Chief Economist Peter Praet (economists for once seeming to agree) and finally by BuBa President and ECB über-hawk Jens Weidmann himself.
The idea to increase German pay is not new. In March 2010 Christine Lagarde, then French finance minister, urged German employers to boost workers’ salaries, which led to a forceful rebuff from Wolfgang Schäuble, then as now Germany's finance minister. Referring to the good performance of French football teams that year he stated: “Christine, I’m a Bayern Munich fan. When Bayern were outplayed twice by Olympique Lyon in the Champions League, I thought to myself, if Lyon had only played a bit worse, Bayern would have had it easier. But we can’t build a competitive economy on this basis.”
Since then Lagarde has become managing director of the IMF and Bayern Munich has improved, winning the Champion’s League in 2013. That said, one can understand her advocating for higher German pay. Though conservative, she is first and foremost a native of France, a country with a long tradition of government interference in the economy.
Moreover, from a macroeconomic perspective, the idea makes sense for at least three reasons. First, it seems that the Eurozone economy is again stalling. Italy officially fell back into recession in the second quarter, and Germany's industrial production has entered a soft patch. True, some leading July indicators have been slightly better, and we might see improvement in the second half of the year. But this outlook doesn’t take into account the geopolitical tensions and sanctions on Russia, which could yet weigh on the business cycle. Therefore a lift from German consumption would be welcome in Europe.
Second, the burden of rebalancing the Eurozone economies has thus far been borne mainly by the European periphery through internal devaluation. Unit labor costs in Spain, Portugal and Greece have been slashed, causing deep recessions. Since this issue is a relative one, boosting German unit labor costs through wage increases would have the same rebalancing effect.
Finally, while the Eurozone’s low-inflation environment cannot yet be termed “deflationary,” July qualifies as the 10th straight month in which the inflation rate has registered significantly below 1%. ECB President Mario Draghi can theorize that depressed energy prices are responsible for the low inflation, which should bottom out by August. But we shouldn’t forget that similar assessments have been made and been wrong for the last nine months, and an inflation boost from German wages would come as a relief.
Still, the Bundesbank and ECB can’t seriously be calling for increased wages. First and foremost, inflation is, ultimately, always and everywhere a monetary phenomenon. If a central bank wants more inflation it can arrange for it by easing its monetary policy. In my view, a central bank that asks for higher wages is admitting defeat.
In addition, the Eurozone is still supposed to be a free market economy (at least I didn’t get the memo stating otherwise). Before the financial crisis, central banks tended to limit themselves to steering one important price: the short-term interest rate. Currently, their unorthodox monetary measures affect all asset prices. Is the next step to influence wages as well? If so, let’s reclassify them as central planning offices instead of central banks.