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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

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.

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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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A leading driver of demand for euro zone imports is industry. The sector is buying capital goods to equip factories, as well as components to put in products such as cars and machines tools, which are still selling well outside the single currency area. Germany in the first quarter imported less Spanish olive oil and more Spanish car parts than in the same period in 2010 - a sign euro zone rebalancing is as dependent on the German exporter as on the German shopper.

The country's economic health bounced back from the global crisis more quickly than others in the euro zone, which spurred private consumers even before this year's wage deals. Unemployment fell to a two-decade low in March, with 2.8 million, or 6.7 per cent, out of work. First-quarter wages were 2.4 per cent higher than a year before. Private consumption generated half of the period's 0.5 per cent growth.

Mr. Geistert recalls that Mercedes-Benz employees received a €4,100 bonus earlier this year from parent company Daimler, which he spent on "another moped for my collection" and a washing machine. But he says the June rise will add a more modest €50 after tax to his and his colleagues' monthly cheques. "I think most of the pay rise will be eaten up by the cost of living or be put into savings accounts," he says.

Traditionally hesitant German consumers appears in no mood to change their behaviour. Holger Schmieding at Berenberg, a German bank, reckons the wage rounds could lift income by as much 3 per cent over the year. "But even if it turns out to be a bit higher, private consumption will rise by only 1 per cent, contributing maybe 0.5 per cent to a forecast gain in GDP [of 1 per cent]. That's something. But it's not a trend that will save Europe."

An indication of consumers' lingering hesitancy is rising demand for housing. Property prices rose 5.5 per cent last year, a stellar rate for a long stolid market. As Mr Schmieding notes: "Germans are buying and building and doing up houses" - a form of spending that usually boosts domestic building suppliers but does not directly help their euro zone partners.

Klaus-Dieter Schwendemann is head of marketing at WeberHaus, a manufacturer of houses that cost up to €2-million and whose components are sourced domestically, thereby not contributing to Germany's trade balance. Years of decline in homebuilding bottomed out in 2009 and picked up in 2010, he says. "Construction permits rose 20 per cent to 103,000 in 2011 - a huge leap."

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The company, based in southwest Germany, built 700 houses last year, a rise of 14 per cent, and Mr Schwendemann expects to sell at least 725 this year, 90 per cent of them in Germany. From the start of the crisis, a remarkable number of buyers paid upfront in cash. "They were transferring assets from equities and savings into bricks and mortar to a degree that we'd never seen."

As Germany's economy strengthened, the more traditional home buyers reinforced demand. "Before 2009 people were worried about job security and the [high] levels of contract workers. Then sentiment turned," he says. "Today, a young engineer has a career perspective and new confidence. Many young families are now looking to build."

That should further reduce the country's dependence on exports and the vagaries of the world economy. Even as fears about poor global growth in the second quarter - that of China, in particular - have grown, some economists have raised their forecasts for Germany. The Bundesbank now expects the economy to grow 1 per cent, not 0.6 per cent, this year - if the global economy holds up.

But the country's household spending ultimately seems to have little bearing on euro zone rebalancing. "I don't think German private consumption - or even construction investment - is that decisive for the rebalancing of the euro zone," says Andreas Rees at UniCredit. As well as welcoming capital investment by German companies, the euro zone should hope German exports will remain strong. "These contain the intermediate products which Germany is importing more of from the euro zone."

Xavier Pujol agrees. He is chief executive of Ficosa, a car-parts manufacturer based in Barcelona, with 8,500 employees and €973-million in revenues in 2011. Spain's competitiveness has already risen, he says. "Our clients in Germany and France and elsewhere are taking this improvement in productivity into consideration."

In the growth area of electronic systems, Mr. Ficosa felt strong enough to start a joint-venture with Sanyo, the Japanese electronics company, and Seat, the Spanish car brand owned by Germany's Volkswagen, to make batteries for electric cars. "More recently, we got a contract with Volkswagen to supply the battery management system for its planned electric vehicle, the e-Up," he says.

With the Spanish economy shrinking, and reforms still being implemented, he is under no illusion about the tough path ahead. But his company's renewed export successes offer a ray of hope - one ultimately based not on the wage rise Mr. Geistert received but on the 6.5 per cent increase his union failed to win.

Ultimately, says Mr Schmieding, the car workers' 4.3 per cent offered everyone something - consumption and competitiveness. "It was a pay deal which was a bit too high when measured against productivity growth. But it was not too high to endanger the competitiveness of Germany's companies - which is good news for Germany, and also for countries like Italy and Spain."

That the unions like to keep an eye on the macroeconomic environment as much as their members' wallets is well known on German shop floors. Mr. Geistert wonders whether this made IG Metall - Germany's powerful car workers' union - "a bit too quiet" during the financial crisis when it came to pressing workers' demands.

"But, looking back, it was the right thing to do," he concedes. "Can you imagine if we'd triggered a strike wave in or after 2009? We could have made the crisis worse - and longer."

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