By Noah Barkin
BERLIN, March 18 (Reuters) - Germany is emerging as abogeyman of the euro zone crisis, accused of undermining thefiscal stability of its single currency partners with policiesthat depressed spending at home and undercut competitors onexport markets abroad.
But rebalancing the German economy, as euro members likeFrance have urged, is not as straightforward as it might seem.Even if they were open to the idea, it would be tough forpolicymakers to wean the economy off its dependence on exportswhile boosting stubbornly low consumption levels.
Below are some questions and answers about Germany"seconomic imbalances, a source of debate that is likely to growas the 16-nation currency bloc mulls steps to boost fiscalcoordination in order to avert future crises.
WHAT IS BEHIND GERMANY"S BIG TRADE SURPLUS AND WEAKCONSUMPTION LEVELS?
The common thread here is wage restraint. For close to adecade now, German unions have accepted minimal wage rises inexchange for pledges of job security. This pushed down unitlabour costs in Germany for three straight years between 2005and 2007, according to OECD data. In France labour costs rosebetween 1 and 2 percent in each of these years and in Greece theannual rise was 2.8 to 4.8 percent over the same period.
Wage stagnation kept consumption low in Germany whileboosting the competitiveness of German goods abroad. Firms inGermany"s manufacturing-heavy economy took advantage of lowwages to invest and specialise in work-intensive niche sectors,further solidifying their export prowess.
Government policies have also weighed on consumption. Valueadded tax (VAT) was increased by 3 percentage points at thestart of 2007 in a bid to consolidate the budget, depressingspending. Government subsidised "Riester" pensions introduced in2002 contributed to an increase in private savings. Over thelast decade, German savings as a percentage of household incomehave risen 3 percentage points to roughly 12 percent, one of thehighest levels in Europe.
Historical factors like the hyper-inflation of the inter-waryears have also shaped private consumption patterns in Germany,reinforcing an aversion to credit.
IS GERMANY TO BLAME FOR HIGH DEFICITS IN OTHER EURO MEMBERS?
Germany"s big trade surplus, driven by the competitivenessof its exporters, is to a certain extent the flipside of thelarge deficits in less competitive euro zone countries likeGreece or Spain.
Critics argue that by holding down wages, Germany has ineffect depressed its own consumption of foreign goods whilerelying on demand from abroad to fuel its economy. This hascontributed to large imbalances within the euro zone.
But the big deficits of Greece and other euro members arechiefly a function of lax fiscal policies in those countries,exacerbated by the global economic crisis, and consumptionfuelled by the low interest rates that the introduction of theeuro brought.
"The criticism of Germany is a little like blaming the goodschool children for doing their homework because the others whodidn"t do it were punished by the teacher, or in this case themarkets," said Mathias Hoffmann, an economist and professor atZurich University, who has studied German consumption patterns.
WHAT COULD GERMANY DO TO ADDRESS ITS ECONOMIC IMBALANCES?
Chancellor Angela Merkel and other members of her governmenthave repeatedly rebuffed suggestions that Germany lessen itsdependence on exports.
But even if policymakers in Berlin were to actively pursue ashift towards more consumption-led growth, they would have fewtools at their disposal, economists say.
"Consumption should be a stronger factor in the Germaneconomy but the government"s ability to influence this, tocounter it aggressively, is limited," said Dirk Schumacher, aneconomist at Goldman Sachs in Frankfurt.
Beyond the setting of minimum wages, the government does nothave much control over wage levels in the broader economy asmost of these are negotiated between companies and unions.
Merkel"s government has vowed to pursue tens of billions ofeuros in tax cuts for middle and lower-income households, but itis questionable whether this relief will lead to higherconsumption given public concerns about job security andGermany"s own debt and deficit levels.
Debt-brake legislation introduced by Merkel"s previous"grand coalition" government also obliges the government tosharply reduce new borrowing from 2011. That means Berlin haslittle leeway to tolerate higher debt and deficit levels whichmight support consumption.
One area where economists agree the government can andshould take action is in the underdeveloped services sector byreducing barriers to entry and red tape.
"Reforms in that sector could lead to a higher level ofdomestic investment relative to savings. There is scope forgrowth enhancing structural reforms there," said JorgenElmeskov, deputy chief economist at the OECD.
(Writing by Noah Barkin; Editing by Toby Chopra)
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