German salaries should go up by 20%

After the introduction of the euro, the German politicians got worried that Germany wasn’t the best place to run a business any more (the “Standort Deutschland” discussion). As a result of this, salaries and other labour costs were lowered. This reform was a success, insomuch as the German economy subsequently boomed.

However, one might argue that this reform was partly responsible for the current euro crisis.

In any area using one currency there will necessarily be areas doing well and other areas doing badly. Normally one would expect the rich areas to have higher salaries, pensions and prices, so that the poorer areas can compete through lower costs.

However, by ruthlessly cutting the costs of doing business, Germany and several other countries in northern Europe have made it almost impossible for southern Europe to compete. In the old days, they would from time to time have devalued their currencies, but now that they can’t do that, they have a real problem. Cutting salaries and pensions (as for instance Greece is doing at the moment) is hardly a great solution, because it makes the local economy grind to a standstill.

I believe Germany (and other high performers in the Eurozone) should accept that they’re benefiting a lot from the euro. If it didn’t exist, lots of European countries would have devalued their currencies drastically, and businesses would be leaving Germany in huge numbers.

I’m half German, so I think I’ve got the right to say that Germany — because of what happened there in the 1930s — has a moral obligation to prevent other countries from sinking into the kind of situation that leads to the emergence of fascism.

My preferred solution would be putting up German salaries and pensions (perhaps by 20% or so). This could be very popular in Germany (“you’ve worked hard, so we think you deserve a pay rise”), and it would immediately make it much more attractive to place a business in Greece or Spain instead of Germany. However, the markets would probably immediately react by lowering the exchange rate of the euro by approximately the same amount, so it’s likely that German products wouldn’t actually get any dearer outwith the EU, which means that unemployment probably wouldn’t rise too much in Germany.

An alternative would be creating eurobonds, as suggested by George Soros and others.

I don’t really care what Germany does, but I’m sick and tired of hearing Merkel lecturing the southern Europeans to become Schwäbische Hausfrauen. I have tons of Swabian housewives in my family, and while they’re absolutely wonderful people, I really don’t think the solution to the Eurozone’s troubles is to turn Greece into a Mediterranean Schwabenland.