Swimming against the tide?

Lost in the midst of headline-grabbing lines -- such as Angela Merkel's claudication on multiculturalism --, one of the most intriguing political declarations of the last few days, with potential implications for the whole EU, has been wildly overlooked by the international media.

Last week, Germany's Industry and Economy Secretary, Rainer Bruederle, echoing recent declarations by several other German politicians, said that it was time to substantially raise industrial salaries in Germany. According to Mr. Bruederle, German workers should reap the benefits the country's relatively fast drive away from recession, citing a 3.6 percent hike for the steel industry as a suitable benchmark. Thanks to its strong, export-led economy, Germany is exiting the downturn at a much higher speed than most European countries, at a 2.2 percent rate for the last quarter -- and rising. 

In the same week that the prestigious German magazine Der Spiegel ran an article on looming protectionism and trade wars, the words of Mr. Bruerdele -- a business-friendly liberal, no less -- seem to be, apparently, out of step with reality. It would hurt Germany's industries, leading to higher costs and loss of competitivity, right? Isn't that unfortunate that, in the midst of a strong, export-led recovery, a highly influential Government figure puts such pressure on German employers?

Let's stop for a moment and think about what's behind this affirmation and what these wage increases could really mean. First, German workers have largely held back on demands for pay rises over the past two years in an effort to protect jobs during the recession, even accepting reduced shifts -- in a very successful plan coordinated with the German Government. However, productivity levels have constantly been on the rise, and not only since the world financial crisis struck: German labour productivity has increased much faster than salaries for the past 10+ years, turning Germany from a country beleaguered by competitivity problems (in part due to high salaries) to an export powerhouse, known for its extremely reliable, well-crafted machinery and industrial products.

The German export model can not be compared to the Chinese: down in the Pearl river delta, entrepreneurs survive with extremely tight margins (sometimes, of just 2-3%), making any sudden shift in labour costs -- or even the looming strengthening of the yuan -- potentially disastrous. German export-oriented, family-run businesses and big industrial conglomerates (think Siemens or Volkswagen, among others) can withhold modest, controlled salary raises. Productivity costs would obviously rise, but that would not substantially dent profit margins. In fact, one can argue that the surplus cost could be passed on the final customers, as many German industrial products have no real rivals anywhere in the world, be it for their uniqueness and specialisation or for their extraordinary craftmanship, reliability and durability.

Therefore, generalized pay raises would not really hurt Germany's export capacity. However, they would effectively help offset trade imbalances by boosting internal consumption. Historically lacking, Germany's consumption share of the GDP has always been low by European standards, helping fuel gaping intereuropean trade imbalances. A mere 3% raise in salaries would surely mean that at least half this increase would go to internal consumption, thus helping revitalize the internal consumer market, which drives imports from the U.S., Asia and other EU countries. Therefore, although a modest move, it would not only be fair for German workers, who have been losing purchasing power for years and accepted to work for reduced hours when the crisis hit, but also towards Germany's neighbours, as the current stark trade imbalance within EU countries is hurting European economy as a whole -- by putting a brake or even halting recovery prospects in other economies which rely on the 82-million strong German internal market.

Although Bundesbank President Axel Weber -- a financial hawk who was also against a permanent European 'safety net' for troubled countries and who is currently pushing for an increase in European interest rates, although many eurozone economies are not yet out of the recession -- has warned against actively propping up domestic demand and fuelling inflationary pressures by encouraging higher wage deals, this is a move Germany could afford and should promptly do. As many in the U.S. are now realizing, perpetual trade imbalances are bad for the global economy. Germany is not China, and its trade balance won't revert overnight after some modest wage increases. However, as the saying goes, small changes can be powerful.

In the mood for love?

I recently found a very peculiar article on FP's website. It is called Bad Exes and it points out five former heads of state who, in the author's opinion, have devoted their post-spotlight time to mess around in an unhelpful manner. Although the inclusion of figures such as former Spanish Prime Minister José María Aznar is more than justified, I was shocked to see that the list is headed by Germany's former Chancellor, Gerhard Schröder.

Always an advocate of the European Union and relatively pro-Russia as a Chancellor, Schröder did not hesitate to publicly display his respect for his Russian friends and, of course, to accept their money: his dealings with Russian businessmen (read oligarchs) and authorities are well documented and have led him to the chair of the Gazprom's Nord Stream pipeline project

So, the criticism seems to be fair enough. Or isn't it? Of course, one can argue that Schröder might be into it just for the money. However, let's take a longer view: maybe the European Union should show more receptiveness towards Russia if it wants to regain its clout in global affairs.

The issue is clear: neither Russia nor the EU can keep ignoring each other in a globalized world, where power is rapidly shifting East. Russia needs to modernize and diversify its economy with Western technology and know-how, and the EU needs access to the energy sources and raw materials Russia possesses in abudance. However, the EU is obviously reluctant to having closer ties to Russia because of its undemocratic regime and constant violations of human rights: this would go against the very principles of the Union, at least in the short term... but what if we think mid- or long-term?

In the face of the global financial crisis and the return of gas and oil prices to normal, pre-bubble prices, Russia has made clear it badly needs the transfer of advanced technology to create a more modern society. Russian officials hope that this would drive the country away from its current dependence on energy exports.

If the country does indeed move forward towards the modernization path, it would obviously lead to more white collar jobs, not directly linked to the extraction and exportation of raw materials and energy resources. This would, in turn, create a bigger, more educated middle-class that would push for political opening and freedom of speech. In other words, we could see what we have seen in the past in Western societies: what Russia lacks today is an effective civil society, able to push for its civil rights and freedoms. Russian society is a highly polarized one, where almost all middle- and upper-class citizens owe their well-being to the state or a big state-sponsored or company. 

Thus, a technologically-boosted Russia could lead, in the mid term, to a growing respect of democratic values and human rights in this country -- which is precisely what Europe would like to see. And who is readier than the West to provide Russia with the technology it wants? The answer is clear: the U.S., Japan and, obviously, the EU countries. What we see here is, in short, a win-win situation: Russia modernizes and maybe ends up opening up freedom-wise, while advanced European companies get a boost to their exports with a new, big market.

Of course, as foreign investors claim, Russia suffers from rampant corruption, untrustworthy courts, stifling bureaucracy and poor protection for property rights. This should effectively and immediately be dealt with by the Russian government. However, the EU could substantially help via a very juicy incentive: the prompt establisment of a privileged partnership with Russia -- and, of course, also with the rest of the countries in Eastern Europe not yet part of the EU, including Ukraine and Belarus.

Now is also the right moment to act. Although Russia continues to develop its commercial and strategic relationship with China, it does so reluctantly. Russia is also aware of growing Chinese influence in the greater Asia, including its own underpopulated -- but extremely resource-rich -- region of Siberia and, of course, the Central Asian countries, long seen by Russia as its backyard. This explains, for instance, the recent sale of Russian armament to the Vietnamese army (underlining the continuation and intensification of a trend), which is looking to protect its interests in the face of Chinese expansionism in the East Sea. 

After a confidential report calling for a rapprochement to the West was leaked last May, it is undeniable that, under President Medvedev, Russia's foreign policy has clearly moved from ideology and invective towards pragmatism and profit. 

Therefore, the race is on: both China and the EU are worried about Russia's moves towards the other, and wish to have it by its side -- with Chinese top foreign policy experts such as Yang Jiemian openly vying for a closer relationship with Russia. China has its SOEs, which can pay hefty, above-market rates for energy resources and raw materials, but the EU has the technological edge, and what Russia really needs is to modernize its economy, not perpetuating its dependence on energy exports.

It's about time that both Russia and the EU do something to regain their lost relevance. They should just seriously consider acting together.