Is it really all doom and gloom? Not necessarily. Germany’s economy might adjust automatically. Mr Delpla at the Conseil d’Analyse Economique points out that as a result of wage moderation, corporate profits have risen to about 40 per cent of GDP – much higher than most European countries. Some kind of rebalancing appears inevitable, as “German trade unions will become angry about not seeing their wages go up”, he says.
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The worry is that inflexible European economies will take too long to adjust, risking social conflict and political tensions. Germany’s experience in the past decade shows it can take years to restore competitiveness within Europe’s monetary union, in which exchange rates are fixed – and the global environment at the time was much more favourable.
Germany’s lead might, moreover, simply prove too great for others. Until last year, when pushed sharply higher by the collapse in production, its unit labour costs had barely risen in a decade. Over the same period, these had risen in Spain, Ireland and Greece by 25 per cent or more. Even France showed a nearly 20 per cent increase.
“The magnitude [of the adjustment needed] is so big that it is going to be extremely long and painful – especially if we are in a very low-inflation environment,” says Jean Pisani-Ferry of the Brussels-based Bruegel thinktank. “If German wages are frozen, it is almost hopeless what you can achieve in a country like Spain.”
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Is it really all doom and gloom? Not necessarily. Germany’s economy might adjust automatically. Mr Delpla at the Conseil d’Analyse Economique points out that as a result of wage moderation, corporate profits have risen to about 40 per cent of GDP – much higher than most European countries. Some kind of rebalancing appears inevitable, as “German trade unions will become angry about not seeing their wages go up”, he says.
/.../
The worry is that inflexible European economies will take too long to adjust, risking social conflict and political tensions. Germany’s experience in the past decade shows it can take years to restore competitiveness within Europe’s monetary union, in which exchange rates are fixed – and the global environment at the time was much more favourable.
Germany’s lead might, moreover, simply prove too great for others. Until last year, when pushed sharply higher by the collapse in production, its unit labour costs had barely risen in a decade. Over the same period, these had risen in Spain, Ireland and Greece by 25 per cent or more. Even France showed a nearly 20 per cent increase.
“The magnitude [of the adjustment needed] is so big that it is going to be extremely long and painful – especially if we are in a very low-inflation environment,” says Jean Pisani-Ferry of the Brussels-based Bruegel thinktank. “If German wages are frozen, it is almost hopeless what you can achieve in a country like Spain.”
http://www.ft.com/cms/s/0/b95fe7f8-36b7-11df-b810-00144feabdc0.html