For sharing the burden of macroeconomic adjustment, commentators such as Martin Wolf and Paul Krugman have suggested that Germany should lower its competitiveness, say, by means of a considerable hike in wages; in other words, a larger increase than is warranted by conditions on the German labour market. The idea behind this is that competitiveness is relative: one country’s loss is another country’s gain.
Unfortunately, according to our own estimates, the results of such a policy would be likely to disappoint. We assumed an additional wage increase in Germany of 2 percentage points above what would normally be expected as the outcome of bargaining. Then we used our economic models to calculate the effect that such an increase would have on the exports of peripheral euro-area countries.