German Wage Hikes Are Good News For Global Economy
Analyst: David Kelland
Ever since former Fed Chairman Ben Bernanke gave his speech about the global savings glut in 2005, much attention has been paid by the commentariat to global financial imbalances. These imbalances, according to promoters of this theory, arise from countries that consistently run current account surpluses (save too much) and they are destabilizing because they cause lower interest rates and therefore excessive investment in current account deficit countries.
According to the theory, the excessive savings in Germany, China, and the petro-states must be offset by current account deficits in other countries. This truism of accounting may have led to the housing bubbles in the U.S., the U.K., and peripheral Europe. The buying of our long-term debt by China (investing its excess savings) resulted in Ben Bernanke's famous 'conundrum' - that long-term bond yields failed to rise despite steady rate hikes from the Federal Reserve.* Had interest rates of all maturities risen as the Fed raised rates, mortgages would not have been so cheap and perhaps the housing bubble would not have gone so far. German Landesbanks contributed as well, famously piling in to mortgage-backed securities that later caused some to go bankrupt and others to seek bailouts.
The imbalances are not only international. Within the eurozone, Germany's surpluses are offset by borrowing in the European periphery. As Michael Pettis of Peking University argues
, large excesses of savings over investment almost certainly encouraged the European periphery to borrow and spend too much leading up to the crisis.
Moving forward to today, there is actually some good news on the subject of imbalances. German workers are beginning to see wage gains due to a recently imposed minimum wage and successful union negotiations (for the workers). Higher wages in Germany will lead it to import more goods from the periphery and will also help Europe with convergence of unit labor costs (wages adjusted for productivity).
In the run-up to the financial crisis, unit labor costs in the European periphery climbed steadily relative to those in the European core. Now, in order to regain competitiveness, wages in the periphery must fall relative to wages in Germany. In essence, Europe needs either inflation in Germany, more depression in the periphery, a breakup of the union, or fiscal transfers from the core to the periphery. Of these four scenarios, the first is the most painless and plausible (fiscal transfers are probably a non-starter in Germany and France) and Europe is thankfully moving in that direction.
On the international front, imbalances may be melting away too. Saudi Arabia will run a deficit of $39 billion this year due to lower oil prices and higher military spending. If that country is representative of the trend in the petro-states, the result will be a more stable financial world. As for China, its leadership continues to talk about adjusting the economy to a more sustainable model. In any event, its own financial system may need a bailout soon due to the lending spree resulting from the 2009 stimulus and that would decrease its savings rate as well.
There are many reasons to worry about the global economy, but at least this risk may be on the wane.
- David Kelland, Briefing.com