In memory of Dr. Andreas Höfert

Strikes in Germany are bad for me, but good for the euro

| Posted by: Andreas Höfert | Tags: Follow UBS, Andreas Höfert

For over 10 years now, I have done roadshows in France twice a year, once in the spring and once in the fall, to present UBS’s economic outlook and investment strategy. Those trips have always smacked of adventure. Taking trains, planes and even automobiles has been like playing a lottery in which the winning ticket means that everything goes as planned.

More often than not, strikes jeopardized meetings and client events. If it hadn’t been for my French colleagues being accustomed to them and able to apply “le système D” (loosely translated as “shrewd resourcefulness”), I would have been stranded. In France, strikes are part of the culture. Of course, people grumble but most regard them stoically and even with a sense of humor as something inevitable.

By contrast Germany, to which I also travel twice a year, is a paragon of exactitude. Once the travel itinerary is set, nothing can derail it. Trains, planes and automobiles are almost always on time – and you get an obsequious apology on the rare occasions they aren’t. At least this was the case until my last trip, three weeks ago, when I was caught by the announcement of a railway strike in Bielefeld, as close to the middle of nowhere as you can get in Germany. Fortunately, my German colleagues efficiently found travel alternatives and I made all my scheduled meetings in time.

This was already the ninth railway strike in Germany within the last twelve months, and each has become a bit more confrontational. Moreover, the strikes are not confined to the transportation sector. Even kindergarten personnel and post office workers have walked off the job for short periods of time. While the issues are sometimes confusing (against privatizations, for the right to strike if you are a minority trade union, etc.), the basic message remains the same: a demand for wage increases and more income.

For many years, German labor conflicts were resolved behind closed doors by means of negotiated agreements between labor and management. However, it seems that the social peace has become fragile of late. This year could become the worst in terms of strikes since the 2000s. The economic research institute DIW, based in Cologne, has forecast that almost 450,000 working days will be lost to job stoppages this year. Whether they will lower GDP remains to be seen but according to the calculations of my German economist colleagues the railway walkouts will barely be noticed.

The strikes come after more than a decade of falling unit labor costs, which made Germany 15% to 30% more competitive relative to its partners within the Eurozone, and which can be seen as one cause of the euro crisis. The strikes come in a year that Germany will grow, according to our forecasts, by over 2%, significantly above the Eurozone average.

They also come at a time when euro weakness makes Germany even more competitive than countries outside the Eurozone. The country’s export-to-GDP ratio exceeds 60%. Half of those exports go outside the Eurozone. It means that 30% of its GDP is positively impacted by the weak euro. That is three times the percentage it is for France, whose export-to-GDP ratio is only half of Germany’s and of which only a third of exports go outside the Eurozone.

In sum, this means that Germany can afford to loosen its belt a little. Not only would German workers benefit, Germany’s European trading partners would as well. Higher incomes for German workers would mean higher German consumption (and thus more German imports). Also, though many European peripheral countries are closing the competitiveness gap with Germany by reducing their unit labor costs, Germany, by increasing its labor costs somewhat, would contribute to re-balancing the ailing Eurozone. If the price for this ends up being a bit more uncertainty for travelers, it’s one that I, at least, am willing to pay.