* Wage gains, property prices stir German inflation fears
* Some experts fear ECB policy too focused on euro weaklings
* German unions flex muscles, demanding share of economic
spoils
By Noah Barkin
BERLIN, May 2 (Reuters) – While its European partners
agonise about recession, austerity and rising unemployment,
Germany is shifting its attention to a very different, and yet
familiar, source of angst – inflation.
Despite recent data showing German consumer prices rose by
just 2 percent in April, the slowest pace in over a year, some
economists see the beginnings of a dangerous price bubble that
could come back to haunt the country in the years to come.
The high cost of oil and signs that German wages and
property prices are on the rise, after stagnating for the better
part of the last decade, are contributing to the anxiety.
But the main source of concern is the easy monetary policy
of the European Central Bank (ECB), which has pushed interest
rates down to a record low and provided massive amounts of
liquidity to euro zone banks in a desperate bid to stem the debt
crisis that has haunted the bloc since 2009.
The central bank’s approach may be appropriate for countries
like Spain and Greece, which are struggling with crushing
recessions and unemployment rates approaching 25 percent.
But it poses a growing risk to healthy Germany, the argument
goes, even if the true threat to Europe’s largest economy may
not become apparent for many months.
“In the years after the euro’s launch, interest rates were
too high for Germany and too low for countries like Spain and
Ireland. Now the story has been turned on its head,” said
Joachim Scheide, head of forecasting at the Kiel Institute for
the World Economy.
“There’s nothing dramatic happening at the moment, but the
inflation dangers for Germany over the next two to three years
are very high,” he said. “There is a significant risk that this
ends in disaster.”
The Kiel institute was one of eight think-tanks to warn last
month in a twice-yearly report that the dire state of some euro
members could make it difficult for the ECB to return to a more
normal policy stance in time to prevent a strong rise in German
inflation.
A week later, in an unusual public foray into the realm of
monetary policy, German Economy Minister Philipp Roesler called
– in a written statement approved by the cabinet – for the ECB
to return to “normal mode” and focus on its “clear mandate” of
price stability.
That made it official – the German government itself was
worried about inflation.
VISCERAL AVERSION
Why is this significant? After all Germans have had a
visceral aversion to higher prices ever since hyperinflation
under the Weimar Republic in the early 1920s eviscerated the
savings of an entire generation. Worrying about price rises is
nothing new for Germany.
The big difference with the current bout of angst is that it
could have huge implications for Europe and its hopes of
emerging from its debt crisis.
Higher German wages, some economists believe, are precisely
what are needed to get the bloc back on track.
If German consumers had a bit more disposable income, it
could boost demand for imported products from Europe’s ailing
periphery, bolstering growth there. If German workers cost a bit
more, Germany’s competitive advantage might be reduced, making
it easier for other European countries to sell their goods.
If there was ever a time for Germany to tolerate higher
prices, it may be now.
That’s why public expressions of inflation anxiety in
Germany are worrying to some. Should the fears harden over the
course of this year, pressure on the ECB to rein in its
expansionary policy – from the Bundesbank, politicians and the
German media – would surely grow.
If that pressure led to a more restrictive monetary policy,
it could render moot the soon-to-be-unveiled growth strategy
European leaders have been talking about so much in recent
weeks.
“If the people in charge – mostly the Germans at this point
– insist that the adjustment must come entirely through a fall
in the absolute level of wages and prices in countries with
current account deficits and large amounts of debt, then Europe
is in for a difficult, and perhaps lost, decade,” MIT professor
and former IMF chief economist Simon Johnson wrote this week.
“But if part of the adjustment can come through higher
German wages – recognizing productivity gains and consistent
with continued prosperity – the path forward will be easier.”
“IT’S OUR TURN NOW”
So does Germany really have an inflation problem?
German wages are certainly on the rise. Last month,
Chancellor Angela Merkel’s conservative party said it would try
to introduce a new nationwide minimum wage law in parliament by
the end of the year, a move which would push up salaries in one
fell swoop.
In March, the two million workers in the German public
sector received a pay increase of 6.3 percent over two years. IG
Metall, which represents 3.6 million workers in the engineering
sector, is demanding a 6.5 percent raise for this year alone.
The union’s readiness to launch warning strikes this week
and the bolder rhetoric of its leaders underscores just how
strong its position has become in a sector where many firms are
delivering robust profits, working at full capacity and
struggling with skilled labour shortages.
“It’s our turn now,” Michael Sommer, head of the DGB
federation of German unions, said in a May Day speech.
Still, fears of a German wage-price spiral seem overdone to
many economists. Data published by the Federal Statistics Office
last month showed that hourly labour costs in the German private
sector rose at the lowest rate – 19.4 percent – of any country
in the European Union over the past decade.
In France, the increase was 39.2 percent, more than double
that of Germany. The EU average was 36.1 percent.
“Wages are rising, but this follows a prolonged period of
restraint,” said Andreas Rees, chief German economist at
Unicredit in Munich.
“I honestly can’t see any reason to worry about these wage
deals nor to think the inflation rate will rise significantly in
the next years. German growth simply isn’t strong enough to
generate runaway prices.”
Worries about overheating in the German property market also
seem premature. Like wages, German real estate prices stagnated
over the past ten years, even as those in countries like Ireland
and Spain shot to astronomical levels, before crashing hard.
That changed in 2011. Rock-bottom domestic interest rates
and safe-haven buying from abroad at the height of the debt
crisis fuelled a mini-buying frenzy, sparking double-digit price
increases in some German metropolitan areas.
But Alexander Koch, a colleague of Rees at Unicredit who
published an in-depth study of the recent price gains in March,
sees no evidence of a bubble.
In Koch’s “Overheating Barometer”, an index of five real
estate market indicators which measures market excesses on a
zero to five scale, with five signalling the highest alert
level, Germany scored just one – below France and in line with
Italy and the United Kingdom.
Analyses like these do not reassure experts like Scheide
from the Kiel institute, who believes persistently low interest
rates over a period of years have the potential to produce a
Spanish-style housing bubble in Germany.
“We could see inflation of 4 or 5 percent in Germany if
wages and property prices get out of hand. This would lead to a
massive correction, to a recession,” Scheide say. “This is a
real test for the ECB.”
The last time Germany had inflation rates that high was in
the years after reunification in 1990, when massive amounts of
money were pumped into the former communist East. Over the past
15 years, annual inflation has averaged a mere 1.5 percent and
never exceeded 2.6 percent.
And that may be the crux of the issue, says Holger
Schmieding, chief economist at Berenberg Bank.
“Germany is used to having less inflation than its
neighbours,” he said. “Now, because of its economic strength, it
needs to get used to having more.”
(Reporting by Noah Barkin; editing by Janet McBride)
