Chancellor Merkel should remember that Spain is not Germany

FRANKFORT | That is the view from Berlin: the biggest problem Germany contends with is Europe. And this is so particularly because of this fact, more than 17 million people are unemployed in the euro zone. But while in Austria the unemployment rises to 4.2% and 5.7% in Germany, the Spanish labour market suffers the tragedy of jobless figures that come to 23.6%. And there is no prospect of improvement.

The problem is crucial because it reflects the difference in the intensity with which the crisis hits a country. In that sense, Europe is a divided continent. And the solutions thereof may not be the same for everyone. While the German economy is doing well, countries like Spain are still drowning. German GDP grew 3% in 2011 and the unemployment rate is the lowest for 20 years. So the only concern here is inflation. In February, consumer prices rose by 2.3% over the same period last year. Energy is expensive and labour costs have been on the rise, too, with higher salaries. The president of the Bundesbank, Jens Weidmann, has warned that increasing wages could accelerate inflation and slowing economic growth. On the other hand, Mario Draghi, the head of the ECB, can not raise interest rates as it would be in Germany because countries such as Spain would require even lower rates to fight back against the crisis. Draghi’s dilemma is the dilemma of Weidmann, who want a tighter monetary policy to control inflation, the beast everybody in Germany fears.

But Draghi guides his decisions by looking at European average measures. While Germany is shining, countries like Spain are in stuck and in dire need of any signs of improvement. When it was introduced 13 years ago, the euro meant that interest rates in Spain, Italy, Portugal and Ireland plummeted, which triggered an investment boom in these countries. By contrast, Germany’s growth stalled: more than five million people were left unemployed.

According to German experts, unemployment will continue increasing in Europe. For Raphael Brun-Aguerre, at JP Morgan Bank, it will cause poverty in the periphery and a cyclical slowdown in France and Germany.

In this situation, Jens Weidmann and Mario Draghi should sit together and come up with a joint plan. And, according to the German press, they sort of try. Although Weidmann wants to preserve the independence of the Bundesbank and protect his country from inflation, the circumstances in other countries are incomparably harder. Weidmann defended the ECB’s independence but warned about the risks of 0ne trillion euro cheap credit for European banks. He looks after the German taxpayers.

Draghi also speaks of the need to temporarily limit the policy of cheap money. He fears that banks and States can get used to it and engage in riskier business. Munich-based daily Süddeutsche Zeitung complained in April because since sovereign debt yields dropped, due to ECB liquidity support, public opposition to reforms has gained momentum.

“This is the case of Italy, with its yet to be approved labour reform, France (its campaign are just promises), and Spain, which wants to reduce the deficit but in taking its time,” criticized the German newspaper. “Politicians are more relaxed than they should,” Weidmann said.

Analysts Markus Zyndra and Alexander Hageluken believe that both Weidmann and Draghi will find themselves at odds when the ECB has to stop financing banks and States. In Germany, many worry because in recent months banks with financial difficulties have issued their own debt, guaranteed by their respective governments, with the aim of ​​borrowing money from the ECB. Weidmann wants to end this programme by mid-year.

The biggest problem of Germany may be Europe because Germany ended 2011 with record employment. But what sort of jobs is the German economy providing? The famous minijobs, contracts with a maximum pay of €400 per month and for which the employee is not listed on the national insurance system, lead to poverty in old age. For those who spend their lives working under these conditions, retirement will not exceed €200 per month. Some 7.4 million people, including 4.65 million women, have minijobs in Germany. For three quarters of them, it is the only source of income. The conservative coalition headed by Angela Merkel has had to announce plans to directly subsidise these minipensiones from 2013.

It is true that wage moderation and labour market reforms have successfully tackled unemployment in Germany. The German model has even become a model for countries seeking to reduce unemployment and be more competitive. But those same reforms that helped to create temporary employment and underpaid jobs, and a new age of inequality. Social differences have become the major challenge in wealthy Germany. Not the best context to ask Germans for more help towards the rest of Europe.

So far, German people applauds Merkel’s strategy of imposing savings and labour market reforms before providing aid. But as Volker Kauder, the chairman of the CDU parliamentary group of Germany, said to Rajoy,

“the reforms alone will not be able to generate growth.”

Indeed, Spain or any of the peripheral economies for that matter, is not Germany.