Today, approximately 850 German workers went on strike at two warehouses operated by online retailer Amazon—the first strike in the company’s history. The workers’ demands aren’t just about problems at Amazon. They speak to a larger issue at the heart of the euro crisis: Germany has for years artificially suppressed wages, skewing competitiveness across the region.
It all started with the reunification of East and West Germany during the fall of the Soviet Union. Before reunification, five East German marks bought about one West German deutsche Mark. In 1990, to speed along reunification and help boost the East German economy, German officials began converting East German marks into deutsche Marks at a more favorable rate—from 1:1 to 3:1 depending on the circumstances. Inflation ensued, followed by a tightening in monetary policy, tighter credit, currency appreciation, and then a rise in unemployment.
In 2003, after years of economic stagnation, the Schröder government began reducing wages for the lowest-paid workers, partly by cutting welfare and creating incentives for Germans to take part-time or lower-wage jobs. Reducing labor costs, the government surmised, would lower manufacturing costs and make German exports more competitive. Those reforms set Germany on a path to becoming Europe’s strongest economy.
But many economists argue those policies, which persist today, also brought on the euro crisis. Weaker European economies couldn’t compete with German exports, and German demand for European goods dropped as wages fell. The International Labor Organization argued in 2012 (pdf):
As German unit labour costs were falling relative to those of competitors over the past decade, growth came under pressure in these economies, with adverse consequences for the sustainability of public finances. More importantly, crisis countries were barred from using the export route to make up for the shortfall in domestic demand as their manufacturing sector could not benefit from stronger aggregate demand in Germany…Current problems are an inheritance from the past, when ill-designed policies during the period of German reunification led to a substantial increase in unemployment which subsequently was addressed by deflationary wage policies.
The euro zone has only just begun adjusting to these imbalances; wages are falling in countries like Spain and Greece under austerity, and they’re gradually rising in Germany. Why the shift in Germany’s approach? As the euro zone crisis has raged on, German unions, increasingly marginalized over the last decade, have been gaining clout and piping up about income inequality. Verdi, one of the country’s largest trade unions, has supported the strike (paywall) at Amazon’s warehouses and gained support from non-union employees. Just last month, a similar strike against Lufthansa at Germany’s major airports forced the airline to cancel some 1,700 flights.
In response, Germany’s Social Democratic Party (SPD), which is likely to form a grand coalition with incumbent Chancellor Angela Merkel and the Christian Democratic Union (CDU) in September’s parliamentary elections, has been campaigning to establish a minimum wage of €8.50. Peter Bofinger, one of the most liberal members of Germany’s Council of Economic Experts which advises the government, has called for 5% wage increases across German industries. Other politicians have followed his lead, if more hesitantly.
Correcting the region’s wage imbalances could help boost euro zone growth. German consumer demand for the region’s goods could rise with higher wages, as would export competitiveness across euro zone economies. But as the chart above shows, the rebalancing has a long way to go.