Union Pact Heavy Metal, Moderate Raises

The metal industry’s recent pay settlement with workers won’t slow Germany's economic boom, the author argues.
The wage agreement in the metal industry could spark more in other sectors.

A contract is customarily signed when it promises both parties an advantage. In this sense, the agreement just reached to end the labor dispute in the metal industry is highly efficient.

Employers have avoided both an expensive strike and most of the unions' supplementary demands, and the 3.7 million employees are getting a generous wage increase of 3.4 percent. Considering that inflation is at zero, this is an unusually hefty boost to real wages.

But can Germany afford these sorts of wage settlements? Ingo Kramer, president of the Confederation of German Employers' Associations (BDA), answered the question with “No” in a knee-jerk reaction. He argued the settlement in the metal industry should in no way serve as a model for upcoming negotiations in the chemical industry and the public-service sector of the German states.

But in fact, the German economy is performing splendidly at the moment. Falling oil prices have made many commodities less expensive. Low interest rates are facilitating investments at almost zero interest. German consumers are willing to spend.

And, more than any other economy, export-strong Germany is profiting from the loose monetary policy of the European Central Bank, which for months has successfully used all means possible to lower the euro exchange rate.

“German industry is benefiting from further impulses from abroad,” said an upbeat Hans-Werner Sinn, the head of the Ifo Institute for Economic Research. The think tank’s export expectations rose again in February. For five months in a row now, the companies surveyed in the manufacturing sector said they were hopeful exports would rise.

The auto industry is providing an essential boost. Positive export opportunities are likewise forecast by the chemical industry, in the production and processing of metal, and in electrical engineering.

Other countries have similarly beneficial financial frameworks but don't manage to balance their budgets.

Things looked much different when the monetary union was established. When Germany switched to the euro, it had a high exchange rate for the deutschmark. The German economy was suffering accordingly, workers along with it. Many firms went bankrupt, and workers had to accept reductions in real wages at the same time their counterparts in Spain, Greece or Portugal could rejoice in sizable increases in salaries and prosperity.

Today, this currency shock has been forgotten; with respect to the powerful German economy, the euro is much too weak. Even in comparison with such emerging-nation currencies as the Indian rupee, the euro has lost far more than 10 percent of its value.

Despite the now-agreed wage increase of 3.4 percent, production for the German metalworking industry has become less expensive in comparison with production in India or the United States.

At the moment, many indicators suggest that the boom will last for quite a while in Germany. The scenario of “years of plenty” is much more likely than that of “Germany is living beyond its means.” At the moment, Germany is benefiting from favorable medium-term demographics. The baby boomers are about 50 years old and will certainly remain healthy and productive for a good time to come.

At the same time, the strong economy is attracting young, qualified foreigners from European crisis countries. All in all, this is keeping the lack of skilled workers at bay. What is more, companies are delivering solid performance. Profits of market-listed companies are rising, so that they can pay record dividends to their shareholders — not least of all to their own share-owning employees.

Furthermore, government finances are healthy. Last year, Germany took in a surplus of €18 billion, or $20.4 billion, more than any DAX company. Of course, low interest rates play a crucial role. But if one looks around the rest of the euro zone, other countries have similarly beneficial financial frameworks but don't manage to balance their budgets.

But is a strong German economy enough to free Europe from stagnation? Of course, consumers happy to spend their money and firms willing to make extensive investments lead to an increase in German imports. That helps our European neighbors — at least a little. But it helps Germany in particular, so that the differences among the single-currency countries with regard to economic power are bigger rather than smaller. This can certainly not be said to reduce imbalances.

So German workers in particular can be pleased with significant wage increases. But this should not be expected to end the euro crisis.

 

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