In our last blog post, we referenced a takeway from the PropertyEU property breakfast in London that “wages are increasing for the first time in 20 years in Germany.” In that same vein, Bloomberg recently wrote an article describing the Euro crisis as less like a debt crisis and more like a jobs crisis. This couldn´t be truer. As people in Spain and Greece are out on the streets protesting the 25% unemployment rate in the general population, German wages are going up while unemployment rates reach historically low levels.
So what is going on?
The two graphs we did last June at our Annual General Meeting for our investors explain it all. The below graph shows labour costs over 10 years for the various Eurozone countries (Germany is orange…)
…while the graph below shows the growth differential between Eurozone (excluding Germany) vs. German GDP growth.
As demonstrated above, the German economy trailed that of the rest of the Eurozone between 2000 and 2005 as it grappled with high labour costs. Decreasing labour costs had an almost instantaneous impact on the GDP where the German GDP starting outperforming the rest of the Eurozone.
So what happened?
Around the mid-2000´s, the then prime minister Schroeder and his government recognized the need for change, so enacted a series of reforms to revamp the labour system and make Germany more competitive. The resulting wage – and therefore product cost – decrease had the desired effect. Germany very quickly saw a dramatic shift toward growth. On the flipside of the equation, wages in the rest of the Eurozone countries continued to rise, making those countries less competitive; and ultimately leading to negative GDP growth….and high unemployment.
So, Germany effectively “devalued” its currency through labour costs, while the rest of the Eurozone effectively “inflated” its currency through generous wages and benefits to both public and private sector workers. The fact that these “rich” workers outside of Germany could now buy “cheap” German BMWs further exacerbated the problem of increasing demand for German products and decreasing demand for products from PIIGS and others. So while you saw an uneven transfer of wealth from the ECB (and Germany) to the Eurozone countries from 2000 to 2005, from 2006 to 2011 you saw an uneven transfer of wealth from the Eurozone back to Germany, which is where we are at right now (leaving out the transfer of wealth back to Greece and Spain that has already started occurring through bailouts).
How to solve the Eurozone crisis?
Bring the lines in the above graph to an equal state so labour costs in Germany are not substantially different than labour costs in the rest of the Eurozone, thereby putting all countries on more equal footing. This will require substantial pain for PIIGS and others to decrease wages (which is what they are supposedly doing now) and substantial enjoyment for German workers, at the detriment of long term German competitiveness. To hear that wages have increased for the first time in 20 years in Germany leads me to believe that this is indeed already occurring. Sure, it may mean that growth in Germany will begin to slow (but as we mentioned in the last blog post, Germany is not a place you go anyway for high rental and growth increases) but it may also mean that the entire Eurozone may be on the road to recovery to a state of better equilibrium. After all, if we solve the jobs crisis, we will solve the Euro crisis.