Why German wage increases are good for the Eurozone

By on May 24th, 2012.
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German wage increasesThe decision in Germany to allow wage growth to accelerate is a step in the right direction for the Eurozone.

Disparity in competitiveness between member states has been cited as one of the major causes of the Eurozone debt crisis. Rising inflation and growing labour costs in much of the 17-nation bloc has caused a huge gulf in competitiveness, especially compared to the booming efficiency of the German economy. Since 2007 Germany has experienced nominal wage growth of only 1.0%, whereas the rest of the Eurozone has been subject to an increase of 2.7%. This inflationary imbalance has aggravated the sovereign debt crisis as it has made German exports extremely favourable to those in the rest – and particularly the southern regions – of Europe.

Punch-drunk on cheap credit courtesy of the Eurozone’s one size fits all low interest rate, the southern Eurozone nations borrowed beyond their means and accrued huge debts as their uncompetitive economies stalled. This damaging phenomena could be set to change in the future though as tough cutbacks across the continent have reduced labour costs in an attempt to address the crisis.

On top of that, Germany’s largest industrial union has signed a 13-month deal for a wage increase of 4.3% in an unprecedented move towards higher inflation in Germany. The highest wage increase in the country for two decades should increase demand for imports from European partners, boost consumption, and encourage an influx of German tourists in southern Europe. Eventually it should make products manufactured elsewhere in Europe more competitive relative to those made in Germany.

The agreement between unions and IG Metall in the heart of Germany’s thriving manufacturing sector is seen as a benchmark for wage increases across other sectors of the economy. This rise in labour costs could also lead to a rise in Germany’s inflation rate of 2.2%. Throughout the Euro’s lifespan German officials have remained extremely cautious regarding rising inflation, but it seems that the noose is set to be loosened on the matter as efforts turn to supporting growth in the ailing southern economies.

The German fear of inflation is both rational and understandable; back in the early 1920’s in the aftermath of the First World War hyperinflation reduced the value of the German mark by one trillion percent in less than 5 years. In efforts to pay the huge reparation costs that were required of the country under the Treaty of Versailles act, the German government began to buy foreign currency at any cost. Naturally, this decreased the value of the German mark rapidly and caused a destabilised market.

As the crisis escalated there were times when the cost of a cup of coffee could double in price by the time one had finished drinking it. People who worked with figures such as book-keepers, post-office workers, and bank officers developed a mental disorder known as ‘zero stroke’ as a direct result of the dizzying speed of hyperinflation and the difficulties of calculating transactions in billions and trillions. The disorder was said to leave people totally normal apart from their desire to write endless rows of zeros and complicated equations. The confusion surrounding anything numerical caused some sufferers to state that they were ten million years old or had forty billion children.

The decision in Germany to allow wage growth to accelerate is a step in the right direction for the Eurozone and could lead to a more balanced economical climate as exports in southern Europe begin to pick up and gaps in competitiveness are gradually closed.

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Article source: http://feedproxy.google.com/~r/ForeignExchangeOutlook/~3/F_bdRkbC6CU/

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