markets

Complexity Aside, German Wage Deal Should Cheer Up the ECB

Updated on
  • Union representing almost 4 million workers wins 4.3% pay rise
  • Complex agreements includes one-off payments, flexible hours

Germany’s most powerful union has struck a pay deal with employers that might just satisfy the European Central Bank.

The complex agreement, which stretches over 27 months and includes a 4.3 percent wage hike, one-time payments and options to temporarily cut working hours, boils down to average annual increases of roughly 3.7 percent in 2018 and 4 percent in 2019, according to Oliver Rakau, an economist at Oxford Economics in Frankfurt. It’s enough to be “relatively optimistic” about pay rises across Europe’s largest economy, he said.

ECB policy makers have been watching the collective bargaining talks closely for a confirmation that price pressures are finally on the rise in the euro area, allowing them to gradually remove monetary stimulus. Executive Board member Benoit Coeure said last month that wages were starting to tick up in a very tentative way. His colleague Peter Praet was more cautious, arguing the central bank still had some way to go to put inflation back on track.

“The deal will likely come at the high end of ECB’s expectations,” said Frederik Ducrozet, senior economist at Pictet Wealth Management in Geneva. It should result “in annual wage increases of close to 4 percent over the next couple of years and strengthen their confidence over the medium-term outlook for wage growth and inflation.”

There may even be scope for the ECB to nudge up their forecast for core inflation and policy makers to “gradually become more hawkish,” according to Greg Fuzesi, an economist at JPMorgan Chase & Co. He expects the bond-buying program will end in September and predicts the first rate increase for March next year.

Asked whether a favorable wage agreement in Germany is likely to trigger broad-based raises across the 19-nation region, ECB President Mario Draghi said last month that nominal wage growth is “a very convincing sign of future inflation convergence to our objective.”

Interest in Germany

Policy makers’ interest in Germany is understandable. While unemployment in the region’s largest economy has plummeted to a record low, wages have failed so far to increase significantly. And with other countries still struggling to recover from the consequences of the debt crisis, a pick-up in inflation could be some way off. The ECB doesn’t expect price growth to return to its target of just under 2 percent before the end of 2020.

“The German labor market is in a different situation than many other markets,” said Oxford Economics’s Rakau. The wage deal is “an encouraging sign” that eliminates some of the downside risks to the inflation outlook, “but it doesn’t mean we are getting them in Italy or Spain already.”

The other issue is the sheer complexity of what was agreed after weeks of intense negotiations and 24-hour walkouts. IG Metall, representing 3.9 million workers in the metal and electrical engineering sectors, had originally demanded a 6 percent pay increase over 12 months, as well as subsidized wages for employees who cut their hours to care for family members.

That flexibility may have been the most difficult request for employers, who are already suffering from a shortage of skilled workers. It also cost workers financially, after they turned down an offer for 6.8 percent more pay over 27 months.

“The deal isn’t extremely good for unions, but it isn’t too bad either -- overall they managed to push through more of their demands than expected,” said Andreas Scheuerle, economist at Dekabank in Frankfurt. “If you add the one-off payments and narrow it down to wage growth over one year, that leaves you at about 3.8 percent.”

— With assistance by Christoph Rauwald, and Carolynn Look

(Updates with comment from economist in fifth paragraph.)
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