German neighbours complain about competition

(BERLIN) - As European countries seek to emerge from economic crisis, France accused Germany Monday of trying to boost business on the back 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 imbalances in trade and unit labour costs "and also to countries that have surpluses."

Germany sees the question from another angle.

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

He underscored the role of Germany's "Mittlestand" sector, a vast 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.

In other words, others should follow the German example.

Lagarde was not the first to bemoan Germany's competitive approach.

Salary moderation has 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 passed its crown as the world's leading exporter to China last year, Berlin still benefits from a considerable trade surplus that irks some neighbours.

According to the popular daily Bild, the German parliamentary delegation to the European Union is worried about 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."

Without a general minimum salary, the government cannot directly raise pay.

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

"It is the relative weakness in imports (and consumption) that has led to the sharp widening of the current account surplus," Goldman Sachs economist Dirk Schumacher noted, a trend that is not likely to change soon.

A pay deal negotiated by the IG Metall trade union last month for 3.5 million metallurgy workers favoured job security over pay.

Some economists urge the government to cut taxes to encourage consumption, but the government has to deal with a swollen public deficit resulting from stimulus programmes aimed at dragging Germany out of its worst post-war recession.

And Merkel's 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.