German labour costs: A source of instability in the euro area

In 2010, hourly labour costs in the German private sector increased by only 0.6 per cent. In contrast, the average increases of the EU countries and the countries in the euro-zone were 1.7 and 1.6 per cent, respectively. Thus, even in a year with strong economic growth in Germany, the long term trend continued and, once again, labour costs in Germany rose at a below average rate. Between 2000 and 2010, German labour costs increased on average annually by 1.7 per cent, in contrast to an increase of 2.8 and 3.3 per cent in the euro-zone and European Union, respectively. Overall, Germany ranks in seventh place. Not only the hourly labour costs, but also the German unit labour costs increased significantly less than in most other European countries in recent years. Hence, Germany continuously increased its price competitiveness since the beginning of the European Monetary Union in particular vis-à-vis the countries of the euro-zone. This led to record levels in German exports, but also weakened the balance between external trade and domestic demand in Germany and supported the massive economic imbalances in the euro area.