Germany needs to offset budget deficits, labour costs in the Eurozone

The German Ministry of Finance has proudly announced on March 11 that the country will have its budget practically balanced as of 2014. Structural budget deficits will belong to the past. Thus, Germany’s would be the first of the 25 EU economies to live up to the conditions of the “Fiscal Pact”, which goes back to Berlin’s own initiative in 2010.

From the perspective of a national finance minister, this may be a reason to celebrate the “success” of an austerity policy that has helped keeping unemployment below 7 per cent and the economy achieving–very modest–growth rates.

However important balanced budgets might be for Europe in view of its rising social charges, in particular the huge burden resulting from an ageing population, Germany does not deserve praise for having precipitated the balancing of its budget.

From an EU perspective, with several countries suffering from unsustainable high unemployment, Germany should have continued to run budget deficits of say 2 to 3 per cent for a few more years and play a modest role of locomotive for its neighbours.

Fortunately, the German social partners have done better than their government by agreeing on “aggressive” wage deals, which on average led to wage increases of three per cent in 2012. As a consequence, German unit labour costs have soared by 2.8 per cent in 2011 and 2.6 per cent in 2012. As Spanish, Greek and Portuguese labour costs have declined in parallel, the German current account surplus with the peripheral member countries has fallen, which is to be applauded as an overdue development for a more balanced Eurozone.

European data generate a better understanding among policy makers for the need to think beyond national borders when it comes to fiscal and wage policies. That will make the Eurozone much more sustainable, even if this will take a few years.