Can German wage hikes save Greece?

By Felix Salmon
February 8, 2010
Marco Annunziata has a diagnosis of what ails the PIGS:

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Marco Annunziata has a diagnosis of what ails the PIGS:

Germany has been relying on an export-led growth strategy: With virtually no wage growth over several years, it has rapidly gained competitiveness against most of its European partners, running a substantial current account surplus, which stood at 6.5% of GDP in 2008. As two-thirds of German exports go to other EU countries, it is not surprising that some of them ended up with huge external deficits. With a sharp rebound in international trade now leading the global recovery, Germany sees no reason to change strategy. But Europe, like the U.S., is a relatively closed economy—the bulk of growth for the area as a whole has to be generated by domestic investment and consumption. If Germany continues to compress wages and hence consumption, there are only two possibilities: Either other euro zone members follow suit, in which case the continent will stagnate, or they lose competitiveness, in which case imbalances will be exacerbated. It may seem absurd to suggest that Germany should somehow favor more generous wage dynamics, thereby losing competitiveness, but the alternative at this stage is an unpalatable choice between sustainable stagnation and destabilizing imbalances.

I think that Annunziata has the effects right here, but I do take some issue with his identification of the causes. Yes, Germany is growing through exports, and yes, those exports are mainly to the rest of the EU, and yes, that strategy is succeeding for Germany, if not for the rest of Europe. But no, I don’t think that the key variable here is wages.

It’s true that German wages have not risen over the past few years, but I don’t think that lower wage inflation is the reason for Germany’s export-led success. Germany’s wages are not low, by European standards, and its exports are not cheap. Similarly, “more generous wage dynamics” in Germany would hardly be enough to rescue the PIGS from their plight . Yes, they would mean that German exports get a bit more expensive, but the fact is that German manufacturers aren’t competing with Greek manufacturers in the global market.

As Martin Wolf says, Germany is “the world’s foremost exporter of very high-quality manufactures”, which means that the demand for its goods is highly inelastic. If you want a high-precision medical-equipment component, or high-end music-production software, you want what the Germans are selling, and, within reason, you’ll pay whatever they’re charging — especially when the euro is weak. State-of-the-art optical components aren’t olives, and more expensive machine tools don’t make Mediterranean beach holidays any more or less attractive than they were before.

All of which is not to say that a bit of wage inflation in Germany wouldn’t be a good thing. It’s just that the chief beneficiaries would be the Germans seeing their wages increased, rather than anybody on Europe’s southern fringe. Germany may or may not end up bailing out the PIGS in one way or another. But it can’t do so just by paying its own workers more money.


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The Euro is not weak!!! Certainly, it’s weaker than the 1.50-60 range vs USD it had, but let’s not forget than it started life below parity. I’d say 1.10/1.30 is ball park fair value. EADS plans its profitability on what it considers an expnsive Euro at 1.40…
And please, Southern Europe is not just about olives and beaches.

Posted by fxtrader14 | Report as abusive

From the text of Marco Annunziata:
“They are also the result of the unbalanced pattern of growth within the euro zone. Germany has been relying on an export-led growth strategy: With virtually no wage growth over several years, it has rapidly gained competitiveness against most of its European partners,”

“If Germany continues to compress wages”
Club Med countries don’t compete with Germany, compete with China and Low Cost Manufacturing Countries.
I believe Annunziata is confusing wages with unit labor costs.
Wages in the West part of Germany, betwwen 2002 and 2007 rose around 9%.
Figures from 2009 here 9/20100628/FR-ALL_2009.pdf
If Annunziata study the figures from Exhibit 1 ( cing_Strategy/03_Managing%20price,%20Gai ning%20Profit.pdf) will discover that Germany is acting on Value Creation rather than on Cost Reduction. When one acts on Value Creation, productivity and wages can rise together. When one acts on Cost Reduction, productivity and wages are like cat and mouse.

Posted by ccz1 | Report as abusive

What has changed today in Germany since Hitler in oppression, is style. Has become less baroque and more effective
(Monde Diplomatique)

Posted by John-John111 | Report as abusive