German Unions Seeking Higher Pay Could Save the Euro
Comment of the Day

May 01 2012

Commentary by Eoin Treacy

German Unions Seeking Higher Pay Could Save the Euro

This article by Simon Johnson may be of interest to subscribers although some of his comments on the gold standard are wide of the mark in my opinion; particularly because governments seem capable of getting themselves into trouble regardless of the currency system implemented. Here is a section:
But the cavalry may show up in the unlikely form of German trade unions , which are seeking big wage increases this year. Recent demands by German workers range from 3 percent to 6 percent. As Bloomberg News reported , IG Metall , Europe's biggest labor union with about 3.6 million workers, is demanding 6.5 percent more pay at a time when inflation is about 2 percent.

This isn't crazy. German unemployment is at its lowest level in two decades. German exports have been doing well around the world. To some monetary purists, talk of higher wages suggests that the European Central Bank 's policy is too loose for current German conditions. But this is really taking an idealized version of the gold standard too far.

The point is to have relative wages and prices adjust --higher for Germany and lower for its European trading partners. If German incomes rose, German consumers would have more disposable income with which to buy imported goods. And lower labor costs in other European countries would make their goods and services less costly, giving them a leg up against Germany's export machine.

If the people in charge -- mostly Germans at this point --insist that the adjustment must come entirely through a fall in the absolute level of wages and prices in countries with current-account deficits and large amounts of debt, then Europe is in for a difficult, and perhaps lost, decade.

Eoin Treacy's view A great deal of commentary has focused on the need for a growth strategy if the Eurozone is ever to break out of its current malaise. However, what is really needed is a growth strategy for the Eurozone's periphery, relative to Germany and other core countries. Tax increases, spending cuts and high unemployment all help to increase competitiveness over the long-term but the pain may be too great for a number of countries to bear in an environment which precludes either devaluation or default.

Scarsdale Equities kindly invited me to a lunch discussion with a number of other people while I was in New York. One of the other attendees was a representative from Bayern LB who also voiced the opinion that German wage pressures were increasing. He viewed this as unavoidable in the context of strong corporate performance, declining unemployment and relatively insignificant wage growth following reunification.

Wage demand growth is not currently an issue in countries such as Italy, Spain, Ireland, Greece or Portugal. People are simply happy to have a job. Higher wages in Germany as well as a number of other core Eurozone countries would accelerate convergence in terms of competitiveness. This would help reduce trade deficits and put the Eurozone on a firmer footing. This chart from a report by ECORYS dated September 2011 highlights the loss of competitiveness among Italy, Spain, Portugal and Greece versus the Core 10 since 2000. (Ireland does not appear to have been included in the report).

Europe still faces enormous challenges. The evolution of a fiscal union is going to take time and confidence will be slow to recover. However, over the last six months, the uncertainty related to the ECB's commitment to the Euro has been removed. Re-convergence in rates of competiveness would also be a step toward a resolution to this crisis.

The Euro Stoxx 50 Index encountered resistance in the region of the lower side of the overhead two-year range in late March and pulled back sharply. The six-week decline has lost momentum somewhat of late and a sustained move below 2250 would now be required to check potential for an additional bounce.

Back to top