German wage rises must be politically acceptable
Sir, Martin Wolf (Comment, May 17) makes a strong case for a rise in German wage costs relative to those elsewhere in the eurozone but also recognises the difficulties of bringing this about. Three measures might make such a shift easier and more acceptable in political terms.
First, Germany under the Schröder administration carried out a “fiscal devaluation”: it reduced social security contributions, levied on exports but not imports, but raised value added tax, levied on imports but not exports. Many eurozone countries have since imitated this move, with adverse distributional results. It is appropriate now for Germany to reverse that move and carry out a “fiscal revaluation.”
Second, some wage rises could be programmed not in Germany but along its supply chains into central and eastern Europe. This would appear in the stats as a decline in German productivity rather than a rise in wages but would have the same effect of moderating German competitiveness while also reinforcing solidarity across rich and poor member states.
Finally, it would be valuable to revisit the harsh social security reforms also implemented under Gerhard Schröder in the questionable view that a low wage sector was needed in Germany.
The result was to make Germany an exception to the usual pattern where there is more inequality among the rich than the poor: there are very wide inequalities among the poorer half of German earners and it would be appropriate to move many of the most disadvantaged towards the median. Managed in this way wage costs could be raised with desirable distributional shifts both at home and abroad. Professor John Grahl Economics Department, Middlesex University London NW4, UK