As Germany calls for euro zone austerity, its government is easing up on it. A 6.3 per cent wage increase for public sector workers over two years is likely to be followed by even more generous deals in the private sector. And, why not? A low-deficit Germany can afford it. A stimulated euro-powerhouse is what many economists have called for. The risk is that the zone’s economic divides get worse.
The contrasts between Germany and the euro zone periphery could hardly be more stark. Germany has conceded a good deal to two million public sector workers in the Verdi union after tiring negotiations and small-scale strikes. In Ireland, Spain, Italy and Greece, where public wages have been cut or frozen, strikes and unrest have been serious. Unemployment is above 20 per cent in Greece and Spain — way above Germany’s 8.2 per cent.
German domestic largesse might seem hypocritical. But, unlike the euro zone periphery, Germany repressed wage growth during the past decade. That is part of the reason why its economy is so competitive — though German engineering has long been potent. And, macro success is reflected in a fiscal deficit that won’t far exceed one per cent of GDP despite an enlarged contribution to the European Stability Mechanism.
German workers think it’s payback time. They have a good case. In 2010, the economy grew 3.7 per cent and in 2011 by three per cent, but consumer spending rose just 0.6 per cent and 1.5 per cent. Investment and exports have, as usual, led Germany’s way. Higher wages for Germans redress the balance a bit. Domestic spending should be strengthened, helping imports and supporting growth in the rest of zone. Wage shifts should make the periphery relatively more competitive, too. Periphery economies will benefit if they have exports (or beaches) that appeal to Germans.
But, higher German consumer spending carries a big latent threat. German inflation is currently just 2.1 per cent. The Bundesbank’s Jens Weidmann expects it to rise and more generous wages will make that likely. That might mean the European Central Bank will have to raise rates. That’s another policy shift that would go down badly in the euro periphery. And, widen the zone’s divisions.
