From the TUC

Balancing the European economy

16 Mar 2010, by in Economics, International, Pensions & Investment

It is a sign of the pressure being felt at the heart of the eurozone that France and Germany, the main drivers of the European project, have had such a public spat in the last 24 hours. Yet the subject of that spat is a subject that has exercised many an economist as the economic downturn has progressed.

To recap, France has argued that years of moderate wage rises in Germany has raised the competitiveness of the latter country at the expense of its neighbours. Christine Lagarde, the French finance minister, has told the Financial Times that Germany should raise domestic consumption, helping weaker eurozone nations to boost exports and shore up their finances. Germany has responded by arguing that its success is based on strong companies and has suggested that other countries would be better off building their own industrial sectors in the German fashion than crying foul about German success.

Who is right? Well, both.

The TUC has argued before that the imbalance between producer/exporter countries, such as Germany and, even more obviously on the world stage, China, and consumers, particularly the US but also, to a lesser extent, European countries such as the UK, is unsustainable. It’s all very well for Germany to say that others should follow its lead, but if we all tried to produce and export as much as Germany does, while dampening down domestic consumption, supply would massively outstrip demand. The situation in the world automobile industry, where more cars are  produced than people can buy, but no producer wants to cut supply, would be a microcosm of the economic dilemma facing the world.

Having said that, which of us could say, hand on  heart, that if we had an economic model as successful as Germany’s, especially German levels of industrial success, we’d voluntarily dismantle it?

In recent years, the TUC has called for policies to rebuild Britains industrial base. The aim was not particularly to build an industrial infrastructure to rival Germany’s, which would be setting the bar incredibly high, but to balance our economy away from an over-reliance on financial services and towards more strength in manufacturing and green-tech jobs. Most recently, we called for the establishment of a Strategic Investment Fund, based on the French model, to help build some of those industries. Later this week, we will call for a Budget for growth to be unveiled by the Chancellor on 24th March. We know the Government has more than a passing interest in the type of industrial investment banking that exists in Germany. All of this augers well. Were the UK, and other countries, to eventually improve their industries to the extent that they threatened German dominance, we might need to think about a European industrial policy, so the beggar thy neighbour approach that was taken by countries with regard to Vauxhall/Opel last year does not become the norm. In this sense, France’s criticism of Germany hits the mark, in my view.

What is more, I’m glad that Christine Lagarde raised the issue of German wages. In a way, Germany would be justified in saying that this matter is none of her business, but as the TUC is a member of both the ETUC and the ITUC, and as this has been an issue for German trade unions for so long, I feel justified in commenting. Economic commentators have got so used to presenting wages as a cost, and portraying trade union negotiators as wanting to undermine companies’ success when they bargain for pay increases, that many have forgotten the importance of wages. Of course I declare an interest, as a trade unionist. But wages equals demand for goods and services, and demand for goods and services means a well-functioning economy. What is more, the wages of the lower paid equals proportionately higher demand, as well as social justice. Ministers imposing public sector pay freezes in the mistaken priority of early action to tackle the deficit, please take note. Conservative politicians and European Commission officials who want even earlier/more aggressive action to cut the deficit, please do likewise.