German neighbours complain about competition

(BERLIN) - As Europe seeks to emerge from economic crisis, France accused Germany Monday of trying to boost trade at the expense of Berlin's eurozone partners by squeezing salaries and pushing exports.

French Economy Minister Christine Lagarde told the Financial Times that a German focus on keeping salaries low to stay competitive might not work in the long term.

Lagarde said she was "not sure" the German approach -- "improving competitiveness, putting very high (downward) pressure on its labour costs" -- was "a sustainable model for the long term and for the whole of the group."

"Clearly we need better convergence" within the 16-nation eurozone, the French minister said.

The European Union's competition commissioner, Joaquin Almunia, said in Madrid it was important to pay attention to trade imbalances "and also to countries that have surpluses."

ING senior economist Carsten Brzeski told AFP: "If the eurozone really wants to become a functioning economy, these issues will have to be discussed and they will have to be solved at the eurozone level."

German Chancellor Angela Merkel's spokesman said Monday that "it is better to think about a growth strategy together rather than obliging some to hold back artificially."

He underscored the role of Germany's "Mittlestand" sector, a network of small- and medium-sized enterprizes, often family owned, that are highly specialised, export oriented and "very innovative and very quick to react."

"The question is how can others achieve that," the spokesman said.

Salary moderation has also helped products made in Germany gain market share in many countries, while Germans save more and spend less, reducing imports.

The result is that while Germany was overtaken by China last year as the world's leading exporter, Berlin still benefits from a considerable trade surplus that irks some neighbours.

According to the popular daily Bild, lawmakers representing Germany before the European Union are worried by charges the country "achieves its growth at the expense of others."

The British magazine The Economist last week ran an article under the headline: "Why Germany needs to change, both for its sake and for others."

Berlin's answer? "We are not a country that sets salaries or consumption by decree."

In the 1990s, German unions accepted relatively low pay to preserve jobs as aeging German industries restructured operations to keep abreast of rivals around the world.

Less disposible income, along with higher taxes levied to help develop former communist eastern Germany and a German tendency towards savings resulted in an economy, Europe's biggest, that imported much less than it exported.

The trend that is not likely to change soon, since a pay deal negotiated by the IG Metall trade union last month for 3.5 million metallurgy workers again favoured job security over pay.

"The solution requires stronger German consumption, but that is only part of the solution: other countries have an equally strong responsibility to accelerate structural reforms and boost productivity," UniCredit chief economist Marco Annunziata told AFP.

Some economists say Berlin should cut taxes to boost consumption, but the coalition government is struggling with a growing public deficit as a result of stimulus programmes aimed at dragging Germany out of recession.

"Promised tax cuts by the new government were targeted at this problem but due to in-house fighting, in my view, parts of the momentum were lost," Brzeski said.

Merkel's prickly coalition government partners, the liberal FDP party that would normally back tax cuts, are ready to postpone them until 2012, a party leader said Sunday.