As the Eurozone crisis deepens, the German Finance Minister, Wolfgang Schäuble, has come up with an interesting proposal to help resolve it. He has suggested that the real wages of German workers should be significantly increased. An increase in real wages would increase their spending power, and hence the level of imports that German consumers are able to buy from their neighbours. This would have the beneficial effect of increasing demand for the goods and services produced by France, Spain, Italy, Greece and the other Eurozone countries, helping to stimulate their economies and reduce their payments deficits.
“It is fine if wages in Germany currently rise faster than in other EU countries,” he stated in a magazine interview on May 6th. “These wage increases also serve to reduce the imbalances within Europe.”
But there’s a rub. The German Finance Minister has no direct power to increase the real wages of German workers. And Mr Schäuble’s statement earned an immediate rebuke from the Chairman of the German Employers’ Federation, who said it was no business of politicians to meddle in wage setting decisions, which should be determined by employers and workers.
Both men are right. The Employers’ Federation is right to warn against political interference in wage negotiations. Equally, the Finance Minister is right to say that the real wages of German workers need to be increased.
So how can the impasse be resolved?
Back in the days before the Euro, the German Finance Minister could have achieved a real wage increase throughout the German economy through an upward revaluation of the Deutschmark. The Chairman of the Employers’ Federation would have accepted that this was a matter of macro-economic policy, rightly determined by the German Government.
What is required is a return to this system through the creation of a core Eurozone comprising Germany, the Benelux countries, Austria and Finland. Their currency could then be revalued upwards against the national currencies of the PIIGS (Portugal, Ireland, Italy, Greece and Spain). This would automatically achieve the increase in the real wages of German workers that Mr Schauble recognises is necessary. It would also correct the terms of trade between Germany, which is running a large and persistent payments surplus, on the one hand; and the PIIGS, which are experiencing large and unsustainable payments deficits, on the other.
The current policy of austerity, which requires the PIIGS to tackle their deficits by Draconian spending cutbacks, will only make their economic situation worse. By contrast, an alternative strategy involving an orderly currency realignment would achieve a rebalancing much more easily, avoiding the social distress now being experienced across much of the Eurozone..
This, in my judgement, is exactly what is now required. The problem is that, within the rigid straitjacket of the single currency, such a rebalancing is not possible. And so the Eurozone crisis drags on.