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It’s our Turn to Eat: When Ants Turn into Crickets

Say German workers to the whole world: it is our turn to eat now.

Real gross German wages have increased 1% only in 2011 and 1.5% only in 2010. Much higher the increases in the rest of the Europe and in the euro area (see graph below). Which explains the incredible divergence in this decade among current account balances of euro area countries (Germany vs. euro-Med countries in particular) that so much has put pressure on the euro survival chances, a risk so well synthesized by spread dynamics in this last year.

These internal imbalances cannot disappear  with deflation in the Euro-med countries but through re-flation in German wages that push for higher internal demand in Germany.

A deflation, wage-cut driven, model of rebalancing competitiveness of the kind put in place in some Baltic countries is impossible in Southern Europe. Baltic countries are more ready to sacrifice their new high earning power because they have yet to get fully used to it and because of the fear of falling back in the deadly embrace of the Russian giant. Southern countries like Italy would never accept the needed 20% cut to restore competitiveness (see graph on real gross wage dynamics).

Restoring equilibrium with higher wages in Germany will be an important move. Italy-Germany spreads will go down when this will occur. It would still need to be complemented by a large fiscal expansionary package, but for that to occur forget Germany with its 2013 election and let France with M. Hollande take the lead.

Thank you Ale.

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