A while ago I was invited to Brussels to a meeting organized by the European Commission with representatives of financial institutions in Member States. The meeting brought together chief economists and analysts of banks operating in countries such as Germany, Portugal, Austria, the Czech Republic, Malta, Ireland and others. One evening we were invited to dinner. Yes, I know, dining with bank economists and EU officials alone does not sound like something you would have an awful lot to say about and you might think twice before accepting to attend. Which was why I thought that livening up the atmosphere would be a good idea.

The opportunity was presented to me by a German colleague who was very skeptical about the IMF calling on Germany during its annual review to increase its public investment so as to help re-boost the Eurozone and reduce budget and current account surpluses. He believed that the request made no sense as there wasn`t much to invest in with a more than decent infrastructure. ”You are right, but I can give you an alternative: have all net wages increased by 15-20% (I obviously got a bit carried away there) through tax and legislative measures”, said I.

There was a moment of silence at the table. I went on: “It is what you deserve given your competitiveness and the fact that you are part of the Eurozone: to live better and consume more than your monetary union partners. Just as Greece had to cut down wages and pensions because the euro was too strong a currency for them, Germany should do the exact opposite as the euro is too weak a currency for what the population deserves for its productivity”. “That would be socialism” one of the colleagues commented.

“I am not sure whether that would qualify as more left-leaning than having the wealth created by Germans amassed and managed in a centralized manner through budget surpluses instead of being handed over individually via higher wages” I replied and continued. ” Some might say that the former is the model used for quite some time now by countries like China for which it has attracted so much criticism”.

My German colleague pulled himself together and answered by reminding me that things were already moving in that direction with the minimum wage in Germany up by 3%. I smiled and said: “If Germany was to switch back to the German mark today, it would be at least 15-20% higher than the Euro. That would be the purchasing power growth rate experienced by Germans at least in relation to imported goods which would allow them to increase their standard of living as they would be able to buy more, let`s say, Armani suits from Italy, more Spanish and Portuguese wine, spend more holidays in France and the list could go on.

It would basically be a win-win for all: for Germans and for the others Europeans with the current account deficits of Eurozone countries falling as the German surpluses would drop. At the end of the day it would kick start the Eurozone consumption which in an economic recovery scenario would have to rely more on internal consumption and less on exports anyway. This is what the US is doing and that is why its economic reboot is less dependent on the state of the global economy compared to the Eurozone.”

“But we do not need such a significant wage increase, the retirement system needs to be taken into account, as well” replied my German colleague which helped me conclude our discussion: “Well, as long as there are a few Eurozone countries where you could easily become president or prime-minister by pledging a 20% wage increase across the board, while you, Germans claim to not need it, the future of the Eurozone remains uncertain.”

Have a nice weekend!

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