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Employees of Audi work at an assembly line in Ingolstadt, southern Germany, in a file photo from February, 2012. About 3.6 million workers in Germany’s auto industry received a large pay raise in May. (Lukas Barth/Associated Press)
Employees of Audi work at an assembly line in Ingolstadt, southern Germany, in a file photo from February, 2012. About 3.6 million workers in Germany’s auto industry received a large pay raise in May. (Lukas Barth/Associated Press)

Euro zone: In search of a driver Add to ...

For Tobias Geistert, there was never any question that more money was justified. “Just looking at the price of petrol, it was obvious we needed a pay rise higher than inflation,” says the 24-year-old, who builds engines for Mercedes-Benz in a Berlin factory. Together with 3.6 million other workers in the German car industry and related engineering sectors -- the backbone of Europe’s biggest economy -- Mr Geistert received a big rise in May, even if it was not quite as high as union negotiators had demanded. “No, we didn’t get 6.5 per cent,” he says. “But 4.3 per cent is good.”

Relatively speaking the settlement, one of a series negotiated in the country’s leading industrial sectors, is more than good. Average wages in the crisis-hit euro zone in March were only 2 per cent higher than the year before. In Germany, on the other hand, the 2012 wage round is the best car workers have seen in two decades -- during which time employees endured more moderate real income growth than euro zone neighbours as industry and unions banded together to hold wages down to restore competitiveness. Such restraint delivered significant benefits, enabling exporters to sell more goods at lower prices.

But there was a flipside. Wage restraint damped the enthusiasm of consumers, who spent much of the past decade or so conserving cash, registering savings rates among the highest in the world. That had wider consequences, leading German banks to recycle domestic savings into cheap loans to the booming economies of the euro zone, fuelling the current account deficits and credit bubbles that have blighted euro zone governments from Athens to Rome and Madrid.

For that reason a consensus has emerged that to fix its economy Europe must “rebalance”. Southern states want German workers such as Mr. Geistert to get out there and start spending on more euro zone products -- while Germany calls on the peripheral countries to raise the competitiveness of their products, making them more attractive to German shoppers.

In fact, rebalancing is proving to be as much about German industry taking advantage of increasingly competitive euro zone products as it is about consumers.

The country’s “employment is strong, unemployment is low, wages are rising, so that bodes well for domestically oriented growth”, Subir Lall, the International Monetary Fund’s German mission chief, said this month. In its annual country report, the IMF notes, “several of the elements” needed for a rebalancing are now in place.

The process is under way. In terms of goods, its trade surplus with the rest of the euro zone has fallen from almost 5 per cent of gross domestic product in 2008 to less than 3 per cent at the end of the first quarter. While this is in a part a result of declining consumption in the euro zone’s austerity racked south, imports from the region were up 5 per cent. Germans finally appear to be buying more goods. Market-research company GfK reported this year that 24 per cent were planning to travel more in 2012 than in 2011, with Italy and Spain favourite European destinations.

After years of resisting calls to stimulate consumption, Berlin has in recent months shifted ground. A number of Chancellor Angela Merkel’s ministers spoke out in favour of generous rises as this year’s pay talks started. The Bundesbank, the national central bank, also signalled it would be willing to tolerate a national inflation rate slightly above the euro zone target of 2 per cent.

At the same time, southern European companies were starting to profit from their own austerity measures, imposing wage restraints and welfare reforms. Italy exported 11 per cent more goods to Germany in the first quarter than a year before, and Spain registered a 4 per cent rise. The pull of German consumption was joined by the push of more competitive products from elsewhere.

But these headline figures disguise the fact that Mr. Geistert and his compatriots are not the main drivers of German rebalancing. Though private consumption has risen, it is not booming. Indeed, shoppers seem more intent on putting money into inflation-proof savings vehicles - buying houses or apartments - than spending it on euro zone-made consumer goods.

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