German Wages: Creeping Optimisim

The differences between eurozone members tends to be a key focus for investors and policy makers.  There is another fissure that typically is under-appreciated.  It is within Germany itself, and it is often not discussed in polite company.  It is the divide between German workers and the economic elite.

The German economic model, under which it exports 40% of everything it produces, presupposes a highly disciplined work force, where employers keep the lion's share of productivity gains, and increases in unit labor costs are fiercely resisted.  

German officials pride themselves on rules-based framework.  Yet, to an outsider, they pick and chose which rules they adhere to and which they sweep under the carpet.  German, alongside France, was the first to violate the Stability and Growth Pact.  Both then resisted the imposition of the financial penalty.

We have noted before how the Germany fails to enact its commitment for defense spending under the agreement with NATO, though its banks had little problem loaning money to Greece for it to buy German-made weapon systems.  Along similar lines, Germany has disregarded the IMF, G20 and the EC by not seeking to correct its external surplus.  In fact, in 2014 Germany posted a record trade surplus.

As Thomas Mann once said, what is desired is not a German Europe, but a European Germany.  To this end, what is ultimately needed is a realignment of power between employees and employers in Germany.  There is some reason to be guardedly optimistic.  The largest union in Germany, IG Metall reached a deal with employers that increases pay for 800k metal and electrical workers in Baden-Wurttemberg by 3.4% plus a small one-off payment (150 euros).

IG Metall represents 2.27 mln workers throughout Germany.  The pattern negotiations, under which IG Metall's agreement would form the basis of other labor agreements, have waned, but the IG Metall settlement is likely to encourage other.  Reports suggest 32 regional contracts, covering seven unions and 6.5 mln workers expire this year.  

Often media and analysts talk in terms of Germany as if it were an homogeneous whole. Then what to make nearly 1400 companies being impacted by strike in 2013, more than three-fold increase over 2012?  The data from 2014 has not been reported yet, but there were some large industrial actions against an airline and railway. 

Over the objections of some of her own party, Chancellor Merkel supported last year's introduction of a minimum wage.  It was encouraged by the SPD, who is once again in a coalition with the CDU.  It is set at 8.5 euros an hour.  In January, German unemployment stood at 6.5%, the lowest since reunification.   

This is not the first time post-2010 that German wage increases may surpass the rate of inflation.  It need not reflect a change in regimes or the German model.  Nevertheless to the extent that German wages rise faster, it removes some pressure from other countries to push wages down to be more competitive.   In this context German wage increases should be seen as a net positive for the eurozone, were a weak, fragile and uneven recovery appears to be gaining some traction prior to the launch of the new, more aggressive asset purchase program by the ECB.