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backEUROtalk May, 2012

Can German wage agreements help other eurozone countries?

Labor costs are sinking in the south of the eurozone, while Germany funds generous wage agreements. But is this balancing of inequalities the best way out of the euro crisis?

For the best part of a decade, German unions were more interested in securing jobs than thrashing out percentage wage increases. But an unintentional consequence of their moderate wage agreements was to contribute to the dramatic increase in the economic imbalance in the eurozone. Germany became increasingly competitive, while in the southern peripheral countries, which were experiencing a boom financed by borrowing and debt, labor costs rose dramatically.

We all know what happened next. The southern peripheral states should really have devalued their currencies in order to become competitive again - but they couldn't, because they had the euro. Early on in the crisis Christine Lagarde, then France's Foreign Minister, now head of the International Monetary Fund, pointed out that there was in fact an alternative: Germany, she said, should encourage greater domestic consumption and allow itself to pay higher wages.

Furious debate

Her comment sparked furious debate at the time. Should Germany deliberately slow down in order to reduce tensions in the eurozone? Certainly not, argued the economists. If it did, they said, the southern peripheral states would themselves come under pressure to become more competitive.

Now, however, times have changed. "We're seeing a turning point where wages are concerned," says Jörg Krämer, the leading domestic economist at Commerzbank. In early May, Krämer predicted that in three years' time Spain and Portugal will have completely recovered their ability to compete with the rest of Europe. He bases this prediction on the foreseeable drop in labor costs in these countries. Ireland too, he says, is on the right path.

Wage increases

So the countries worst hit by the crisis are regaining their ability to compete with Germany. This will be made even easier by generous German wage agreements, such as the one for civil servants. This stipulates that the wages and salaries of around two million employees, which rose by 3.5 percent on March 1, 2012, will rise again on January 1, 2013 by 1.4 percent, and by another 1.4 percent on August 1, 2013. This means that within 10 months civil servants' income will rise by 4.9 percent, and after 18 months, they will be looking at a long-term wage increase of 6.3 percent.

Three and a half million employees in the German metal and electrical industries can also look forward to the highest wage increases they have had in 20 years. Their union reached an agreement with employers that they would increase wages by 4.3 percent. Then there is the union for the mining, chemicals and electrical industries (IG BCE), which is also demanding a wage increase of six percent for workers in the chemicals industry. This is also likely to result in a wage agreement well above the current two-percent rate of inflation.

Politically desirable

In pushing for these agreements the unions even have the blessing of the political powers-that-be. Prior to the wage increase discussions, German Finance Minister Wolfgang Schäuble was quoted in an interview as saying that "it's all right if our wages rise more quickly at the moment than in all the other EU countries." Germany had done its homework, he said, and was better able to afford higher wage agreements than other countries: "We have many years of reforms behind us."

The European Commissioner for Economic and Financial Affairs, Olli Rehn, is of the same opinion. At the presentation of the EU Commission's report on the economy, Rehn said that he had been following the German debate about higher wages and a relaxation of inflation policy very closely. "Higher labor costs will continue to foster domestic demand," he said. "That will help to balance the whole economy of the eurozone."

The south catching up, Germany voluntarily slowing down - is that the best way out of the euro crisis? This balancing out of inequalities in the eurozone seems to be what the politicians want. But Jörg Krämer, the Commerzbank economist, sees this as an undesirable development from the economic point of view. "The monetary union as a whole will become weaker if its biggest national economy loses its competitive edge, not just over the peripheral European states but also beyond the eurozone."

Source: Deutsche Welle - GAI

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