As G8 Assembles, Are Germans Prescribing 40% Wage Cuts For Spain, Ireland, Plus Greek Exit?

By Haydn Shaughnessy

As the G8 begins assembling for the Camp David summit this weekend, the future of the Euro-zone is beginning to look clearer. For Irish, Spanish, Portuguese workers the outlook is grim, with the need for deep wage cuts now being aired. For the Greek is looks like as orderly an exit as possible, as soon as possible.  The EU institutions are already making preparations. The consequences for how business might be conducted in Europe, and for any company dependent on European markets  are unprecedented. But at last, once unspeakable solutions are now out in the open.

For companies that see business becoming humanised and more social, it is time to start thinking of how a more collaborative work culture can be constructed in what looks like a period of deep wage retrenchment or, alternatively, a period where wealthier European countries assume the debts of smaller peripheral ones, with a knock on effect on consumers there. Whichever way it plays out, the G8 will mark the point where unpalatable changes finally find their way onto the plate.

First those wage reductions. In a startling documentary broadcast by the BBC last night (The Greaet Euro Crash), former German Chancellor Gerhard Schroeder set out how Germany had grasped the nettle of global competition and won concessions from labor unions that allowed Germany to be competitive, particularly against the Chinese. Few people think of Germany as a country that has reduced its effective wage rates, but that is Schroeder's claim.

Professor Hans-Werner Sinn of the University of Munich, and a member of the Germany Economic Ministry's advisory board, meanwhile, pointed out that labor costs in Spain and Ireland had increased by 30 â¿¿ 40% more than they had in Germany during the same period. So the inference is that Germany cut its cloth to suit global economic conditions, and reaped the benefit. The PIGS did not.

Sinn concludes that wages in the peripheral countries must come down, though that will be extraordinarily painful. But worse for Irish, Spanish, Italian, Portuguese households is that they have already been hit by higher taxes and lower benefits. A 40% reduction in real incomes will feel like a 60% loss. The German position, however, seems to be that the PIGS countries cannot maintain the benefit of wage increases that Germans denied themselves.

The second issue is, what alternatives exist? The Daily Telegraph, this morning, talks of discussions inside the German administration to save the Euro post a Greek exit and Jeremy Warner, Assistant Editor at the Telegraph, ponders the possibility that this will mean  mutualising the euro zone debt, "so that the losses can be absorbed and shared around all member countries." That would also mean considerable debt relief for the PIGS countries but presumably also higher taxes for the inhabitants of other member states.

The third issue is how this will translate to the business community. Will these problems be confined to Europe? They are ultimately consequences of debt, and few advanced economies are free of crippling debt.

But it also needs to translate into the way workplaces function. A lot of the commentary around social business is about a rehumanising of work. But there is already a fine balance there â¿¿ work is becoming ever more uncertain, reflected in a growing freelance community. The job of talent spotters and clever managers is, already, to balance increased uncertainty with the demand for more creativity.

There is considerable hope also that work will come to mean more to people, and that it will integrate more easily into their non-work lives.  That might still be the case but against a backdrop of draconian wage reductions and inevitable conflict. I've said before that social business could easily fail. We need to see it as part of a solution to an emerging economy where price competition and commoditization will undermine many western businesses anyway. Add in a layer of crisis and what you have is a pressing need to redesign the workplace before we lose too many of them.

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