Rebalancing in the north?

Blog post

Rebalancing in the north?

Publishing date: 06 April 2012
Authors: Guntram B. Wolff

A recent debate has emerged on whether it is actually the north, not the south that will start to do the rebalancing in the euro area. In fact, as my colleagues Silvia and Jean have shown here, the ECB has largely acted to prevent a sudden stop in the South – and this of course delays adjustment. One can have a debate about the merits of this approach – there are many in my view. However, it is clear, that price adjustment has been very slow and weak in the south of the eurozone, see my recent column here.

So will adjustment happen from the top with more inflation in Germany? The German public sector wage settlements provide some evidence on this. Wages will be raised in three steps as a result of the “Tarifrunde” of March 30 2012. The overall increase amounts to 6.3% for roughly 2 million employees over 2 years, the next negotiations will start in March 2014.

1. A raise of 3.5 per cent retroactively starting on March 1 2012

2. 1.4 per cent on January 1 2013

3. 1.4 per cent on August 1 2013

If we assume that productivity in this period will grow by around 1.3% and euro area inflation is at 2%, the adjustment in terms of competitiveness is really very marginal. In fact, it would be around 1% relative to the euro average over two years. So even if all wage agreements in Germany were to follow the public sector agreement – which many Germans consider as a very strong agreement – one can hardly say that an adjustment from above has picked up strongly. To close a gap of 20-30%, it would take some 20-30 years. Having annual inflation rates of 2.5% in Germany and 1.5% in the South is much too little an inflation differential to close the competitiveness gaps anytime soon.

About the authors

Guntram B. Wolff

Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB).

From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and advisory board of Elcano. He is also a fellow at the Kiel Institute for the World Economy.

Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media.