A recent debate has emerged on whether it is actually the north, not the south that will start to do the rebalancing in the euro area. In fact, as my colleagues Silvia and Jean have shown here, the ECB has largely acted to prevent a sudden stop in the South – and this of course delays adjustment. One can have a debate about the merits of this approach – there are many in my view. However, it is clear, that price adjustment has been very slow and weak in the south of the eurozone, see my recent column here.
So will adjustment happen from the top with more inflation in Germany? The German public sector wage settlements provide some evidence on this. Wages will be raised in three steps as a result of the “Tarifrunde” of March 30 2012. The overall increase amounts to 6.3% for roughly 2 million employees over 2 years, the next negotiations will start in March 2014.
1. A raise of 3.5 per cent retroactively starting on March 1 2012
2. 1.4 per cent on January 1 2013
3. 1.4 per cent on August 1 2013
If we assume that productivity in this period will grow by around 1.3% and euro area inflation is at 2%, the adjustment in terms of competitiveness is really very marginal. In fact, it would be around 1% relative to the euro average over two years. So even if all wage agreements in Germany were to follow the public sector agreement – which many Germans consider as a very strong agreement – one can hardly say that an adjustment from above has picked up strongly. To close a gap of 20-30%, it would take some 20-30 years. Having annual inflation rates of 2.5% in Germany and 1.5% in the South is much too little an inflation differential to close the competitiveness gaps anytime soon.