German pay hikes good news for Europe if moderate

Wages are rising, within reason. Unions are not in a bellicose mood, and stick to the pragmatic approach that has served the country’s labour market well. This is a welcome development, not only for German workers but also for the rest of Europe.

German workers fighting for higher pay don’t lack supporters. Economists and politicians across Europe would like to see them spend more, and in return help take the continent’s economy out of the doldrums. As things stand, unions aren’t wildly enthusiastic about excessive pay hikes, and settle for quite reasonable ones.

They are happy with pay rises that remain in line with inflation and productivity trends. That will increase consumers’ real spending power without weakening the country’s industrial base. This is better for the German economy, and also for the euro zone as a whole.

Up to about 2010, Germany went through a period of serious wage restraint, constraining domestic demand and contributing to economic and financial imbalances within the currency area. That era has come to an end. In the last two years, wages rose at the fastest pace since 1993.

Labour contracts for 12.5 million workers are to be renegotiated in 2013. Unions are asking for pay increases of between 5 to 6.6 percent. They will ultimately get about half that, if this week’s settlement in the steel industry is any sign. The metal workers’ union initially demanded a 5 percent rise, and agreed on 3 percent after swift negotiations.

That deal is in line with economists’ forecasts. The government’s Council of Economic Experts expects wages to rise 3.2 percent this year. With annual inflation at about 2 percent, real spending power will increase. Due to a widespread penchant for saving rather than spending, the stimulus of domestic demand will be more limited than that number indicates. Meanwhile, real wages in the euro zone periphery are rising slower when they are not falling; so the relative competitive position of Germany’s partners should improve.

German unions are well advised not to demand more. Companies must have time to adjust after a long period of wage restraint. Drastic wage hikes would be detrimental to competitiveness, jobs and ultimately growth. The euro zone can hardly afford to see its only remaining engine sputter.

This article was initially  published as a Reuters Breakingviews comment on 7 March 2013.

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