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.