Germany’s drive to mold the rest of Europe into its economic image may come at a cost for the country’s export machine.
As governments from Italy to Spain and Ireland seek to convince Chancellor Angela Merkel and bondholders that they can fix their balance sheets, officials are pushing through policies designed to restore their competitiveness.
The risk to Germany, whose exports account for almost half of gross domestic product, is that transforming the region’s struggling nations into blueprints of itself may work too well. Efforts by euro-region governments to cut labor costs may help exporters across southern Europe challenge the dominance of German competitors, ranging from Siemens AG, Europe’s largest engineering company, to carmaker Bayerische Motoren Werke AG.
Germany, dubbed "the sick man of Europe" after its struggles to cope with the aftermath of reunification that began in 1990, has turned itself into Europe’s growth engine and the world’s third-biggest exporter after China and the U.S. in 2010 by squeezing wages and diversifying manufacturing.
German labour costs rose at half the pace of Greece’s in the 10 years through 2010, according to the IMK economic institute in Dusseldorf. Export growth averaged 5.2% per year in the same period, compared with 3.1% for Italy.
With the euro region still Germany’s largest export market, Merkel is pushing debt-strapped nations to follow her country’s lead and push through measures to promote economic growth and reduce deficits.
"I would rather focus on growing competitiveness in Europe than constantly having to worry about rescue programs," Merkel said in March. "We’re ensuring that Europe as a whole improves."
That same month, Merkel and French President Nicolas Sarkozy got most of the European Union to sign up to the so-called Euro-Plus Pact to boost competitiveness.
While efforts to stem Europe’s debt crisis have focused on coordinating fiscal policies, leaders also have sought measures to foster growth. As market turmoil threatens economies and corporate earnings across the region, cash-strapped euro members are succumbing to such pressure in order to catch up with better-performing peers.
Italy and Spain, Germany’s biggest potential rivals, should revamp their economies to improve competitiveness that is below the region’s average, the European Commission says. As both countries struggle to cope with bond yields close to euro-era records, Italy should make labor cheaper and Spain should improve productivity and reform its wage practices, according to the commission.
Increases in employment costs of all euro nations outpaced Germany’s in the decade through 2010. German hourly labour costs rose an average 1.7% per year, while they jumped 2.9% in Portugal, 3.2% in Italy, 3.4% in Greece and 4.1% in Spain, the labor union-affiliated IMK institute said Dec. 12. The figures were based on calculations from Eurostat, the E.U. statistics agency.
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