Could higher German wages be the antidote to austerity?



Germany’s government may the chief architect of Europe’s austerity policies, but within the country there are growing calls for a more expansionist economic policy to revive sluggish growth at home and rescue recession-hit eurozone partners.

Trade unions and a growing number of economists are calling for salary increases after years of moderation, saying bigger wages rises in 2013 could bring multiple benefits from increased tax revenue to stronger consumer demand.

“For reasons of European and German stability, the next couple of years should really see wage hikes in Germany of 4 per cent or even slightly more," Professor Gustav Horn, director of Germany’s Macroeconomic Policy Institute (IMK) told reporters in Berlin this month.

A report issued by the IMK on 7 January called for Germany and other eurozone nations to rethink their austerity policies.

"Substantial progress in addressing the crisis in the euro area is only possible if the economic policies of the EU member states in 2013 stop inhibiting growth and switch to a growth-promoting course," the report concludes.

"This requires an end to over tough austerity programmes."

As a new round of collective bargaining gets under way, German trade unions are set to push for the biggest wage rises in years.

The ver.di union which represents public sector workers is calling for pay hikes of 6.5 per cent this year and other unions are also expected to press hard for employers to accept significant increases.

Officials at the German Confederation of Trade Unions (DGB) say rising wages would generate more government revenues through income and sales taxes.

It would also boost the economy through increased demand, by reducing state pension bills by allowing workers to put more money aside and reducing the need for social spending on the so-called "working poor."

Although Germany has fared better than most eurozone countries during the crisis, it has not been immune.

Figures released Tuesday showed growth of just 0.7 per cent last year down from 3 per cent in 2011.

In the fourth quarter, the economy actually contracted, by 0.5 per cent.

Predictions for this year show more anaemic growth of between 0.5 and 0.9 per cent.

Germany has enjoyed such growth largely due to exports beyond the eurozone – such as BMW’s record sales to Asia last year.

However economists believe that more needs to be done to stimulate domestic demand in Germany and in other European markets.



Peter Bofinger, a member of the German Council of Economic Experts which advises the government, has called for a 5 per cent wage increase across German industry arguing the added purchasing power would stimulate growth domestically and boost demand for imports from more troubled southern European countries.

The benefits, he says, will outweigh any risk for short term inflation – the traditional bogeyman of German economists.

"During wage negotiations, we can no longer act as if we were living on an island," Bofinger was quoted by the news weekly Der Spiegel this month.

"We have a choice between two ugly alternatives: either a temporarily higher inflation rate in Germany or deflation in southern Europe."

The DGB is also pushing for Germany to fall in line with most other European nations by introducing a statutory minimum wage.

Union officials quote a recent study that calculated that the introduction of a €8.50 hourly minimum could bring in an extra €7 billion a year into government coffers.

Germany’s parliament is considering a bill to introduce a national minimum wage, but supporters fear it has little hope of being approved before general elections due in September.

Currently national minimum wage rules exists only in certain sectors such as construction and health care.

Collective pay agreements covering some 12.5 million employees are up for re-negotiation this year and the wage issue is expected to loom large ahead of September’s elections.

The issue is already hotting up. Over 7,000 workers at Germany’s biggest energy company E.on joined warning strikes on Monday in support of calls for a 6.5 per cent rise.

The management is offering a 1.1 per cent increase saying poor earnings means it cannot afford more.

Labour representatives say that would mean a fall in real incomes and have threatened an indefinite, nationwide strike.