Yep, Those Germans are the Problem

There has been much press over the last few weeks about the problems in the Euro Zone. Most particularly, we have learned more than we may want to know about the problems of deficit spending in Greece, Spain, Ireland and Portugal. Just recently, though, we may have learned that the problem is not the deficit spending in those recessionary countries. No, the problem seems to be the Germans.

Over the last ten years those nasty Germans have kept the lid on labor cost growth and have jacked up their rates of productivity. (See the Symptom & Implication, “Some competitors automate to become the lowest cost players” on StrategyStreet.com.) These simple actions have enabled Germany to compete on price despite high labor rates and competition from countries in the Euro Zone with nominal lower labor costs. Oh, those countries include Greece, Spain, Ireland and Portugal. Those inconsiderate Germans have produced a Euro 136 billion trade surplus in 2009. Spain, Greece and Portugal ran significant deficits. The Finance Minister of France has suggested that Germany’s export dependent growth model may be causing a lot of the problem in the Euro Zone. Her answer to this problem is for Germany to begin spurring domestic demand. So we see that the problem in the Euro Zone is people who do not deficit spend and who take advantage of all their poorer neighbors who do deficit spend.

This is causing turmoil in the Euro Zone that, in the long run, is almost certainly bad for the Euro. Some countries might have to exit the Euro Zone. Greece has threatened to use IMF resources to continue its deficit spending. The economic disunity in the Euro Zone is creating political disunity as well. There is a question whether the Euro Zone can continue in its present form.

We have similar situations among the states in the United States. The differences are that the states can not threaten to withdraw from the Dollar Zone, nor are they eligible for IMF financing. Our deficit financing states tend to be those with the highest labor costs. As a result, the unemployment rate in these states is higher, often much higher, than that in the country as a whole. In January of 2010, the United States national unemployment rate, as reported by the Bureau of Labor Statistics, showed an average of 10% unemployment in the country. The highest unemployment occurred in Michigan, with a 14.3% rate. Other high unemployment states included Rhode Island, California, Illinois and Ohio. In many of these states, labor costs are not only high, but they are inflexible. Companies can not change work rules, nor adjust rates of labor, to match the current economy. That’s part of the reason that jobs flee these states.

In the Euro Zone, German workers have wages and benefits among the highest in Europe. They average Euro 34 an hour, roughly $48 an hour. Recently, the German Metal Workers Union accepted a new contract with very low wage growth in order to protect their jobs in Germany.

Here is a contrast for you. In 2008, the average worker for the “Big Three” automakers earned $73 an hour in total compensation. Workers at Toyota, and other foreign makers, earned an average of $48 in their U.S. operations. These companies have located their U.S. plants in areas where labor is more flexible. The average U.S. manufacturing worker earned something less than $32 an hour in 2008. These labor cost disparities help us understand how Detroit is losing population. Nearly a quarter of its manufacturing jobs have left. The city suffers from a 50% unemployment rate. Detroit’s woes certainly have contributed to Michigan’s nation-leading 14.3% unemployment rate. But isn’t some of this woe self-inflicted? Why can’t domestic automakers make cars in the U.S. for $48 an hour?

The German unions have learned that they can sustain their high rates of pay only so long as they help their companies become more productive with every hour of labor. The workforce shares a large portion of the improvement in productivity. (See “Audio Tip #187: The Components of Productivity” on StrategyStreet.com.) Apparently, at least one of our leading labor unions does not share that calculus.