Overview : A Little Help From Germany?

After years of wage moderation, the conditions have almost all come together for a certain wage catching-up effect in Germany. The idea is slowly gaining ground that German wage increases would not only benefit local residents, but would also help resolve economic imbalances within the eurozone. First, it would arrive just in time to bolster German household consumption and economic activity, at a time when exports will probably not be as dynamic in 2013 as in previous years. Second, a “controlled” decline in German competitiveness would boost exports in the peripheral countries, which have undertaken painful structural reforms and made major productivity gains since the 2008 crisis. There now seems to be a broad consensus not only within the Eurogroup, but also at the IMF and OECD on the need for peripheral countries to meet their commitments to reduce structural budget deficits “without adding any more austerity.” Indeed, surging unemployment, which hits more than one out of five youth in the eurozone, is now the main risk threatening European construction and social cohesion. In Spain and Greece, unemployment exceeds 26%. It is crucial to do everything possible to halt its progression in order to bolster consumption, production and confidence in the eurozone.

Christine Lagarde, Managing Director of the IMF, has encouraged Germany to raise wages and to let inflation increase slightly, considering that “this too is an aspect of pan-European solidarity”. In Germany, Peter Bofinger, one of the five sages of the Council of Economic Experts1, supports Ms. Lagarde’s position. He recently claimed that there was no other choice but for Germany to accept a temporary increase in inflation while southern Europe undergoes deflation. He favours a 5% increase in wages in all sectors, i.e. 3% to cover competitiveness gains and inflation and another 2% “to save the euro”. This is more than double than what his colleague Wolfgang Franz considers reasonable. Moreover, the Bundesbank recently evaluated the long-term effects of exogenous wage increases on growth and employment in Germany and the eurozone, based on the NiGEM model developed by the National Institute of Economic and Social Research. 2 The econometric results are unequivocal: an exogenous 2% increase in real wages would reduce German GDP by 75bp over a 10-year horizon while growth would remain virtually unchanged in peripheral countries (Spain, Greece, Portugal and Ireland).

Yet the opposition party, which recently won a majority of seats in the Bundesrat (see Ecoweek of 25 January 2013: “Lower Saxony elections do not settle anything”), made fighting inequality and social injustice its main campaign theme, staging an ideological about-face from the 2010 agenda of the Schroeder government. The Bundesrat approved the introduction of a minimum hourly wage of EUR8.50 at the federal level (equivalent to about EUR1,300 monthly based on a 35-hour workweek). If the bill is approved by the Bundestag, which is still far from certain, Germany’s minimum wage would be close to that in the UK, but still much lower than the ones in France, the Netherlands and Ireland. For the moment, only labour and management representatives have the power to set wages.

Wage negotiations by sector concerns about 12.5 million payroll workers, a third of the actively working population. The most powerful labour unions, Ver.di in services and IG Metall in the steel industry, together represent 9 million workers. The first round of wage talks has just begun in a favourable economic environment for labour demands. Germany’s job market has held up well in the face of the global slowdown and eurozone recession. At 6.9% in February, Germany’s jobless rate is near a 20-year historical low, while unemployment in the eurozone hit 12%, the highest level since the beginning of the series in 1993. In public services, Ver.di and the representatives of 800,000 public sector workers have already obtained a 5.6% wage increase spread over two years, with a first increase of 2.65% retroactive to 1 January 2013. Young public sector workers will also benefit from the same job guarantees as the others as well as 30 days of paid vacation annually. The powerful IG Metall union is demanding wage increases of up to 5.5%, while IG Bau is demanding 6.6%. Usually, end results are roughly half that of initial wage demands.

Yet this vision is only held by a minority in Germany, even though 40% of German citizens surveyed by the weekly magazine Focus in early April said they understood criticism directed at Germany, holding it responsible for all of Europe’s woes. Budget orthodoxy and wage moderation are still the keystones of German economic policy. This was illustrated by the adoption of the 2014 budget, which calls for a deficit of less than €7bn, a level that has not been reached since 2000, and the return to a structural equilibrium next year.

BY Caroline NEWHOUSE