28 November 2003

EZA Report 570: Germany-Economy

Moderate German 2004 wage round to dampen ECB concerns
The 4% opening wage claim lodged by the German IG Metall engineering trades union is modest compared to previous starting demands of 6.5%-7%. Therefore the outcome should be substantially lower than the 3.3% increase achieved in 2002. The situation for IG Metall is particularly delicate; part of the rise will be absorbed by a pension scheme agreed in the last wage pact, and the remainder by a probable slight acceleration in inflation. But there are also strategic considerations. Despite IG Metall Chairman Jürgen Peters's stiff rejection of German Chancellor Gerhard Schröder's reform agenda, the cut in unemployment benefits and loosening of dismissal laws could make a high wage strategy backfire. The polemic of other union leaders such as Frank Bsirske from the Ve.rdi public services union thinly conceal the fact that union power and membership are dwindling at a faster pace than at any time during the last 50 years. We expect a headline wage increase of around 2.5% and contract term of 16 months. A 2yr contract is unlikely as unions do not want their room for manoeuvre constrained by the need to support the incumbent government in election year 2006.

SummaryAsset Conclusions: German wage moderation likely to dampen ECB labour market concerns, supporting euro equities, limitiing bond yield rises

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© Graham Bishop