Ending the Surplus

German wages and spending: a modest boost

Demonstrationen der IG Metall in Kiel
A good deal for union workers, but probably not the one foreign economists were hoping for. Source: DPA

Back in 2014, even the Bundesbank got on the bandwagon: Germany’s booming economy could cope with higher wages for its workers, the central bank said. That drew the ire of the country’s export-happy companies, many of whom take pride in having an edge over the global competition and have long resisted the pressure.

Better pay has long been a clarion call from neighboring countries and international organizations, who are concerned that Germany’s massive current-account surplus of more than 8 percent of GDP is putting the world out of whack. Ones who don’t focus on salaries tend to put pressure on the government, calling on Berlin to increase government spending and stop balancing its budget, as it has done for three straight years.

Those critics got a mixed bag of news out of Germany this week. Berlin has agreed a new coalition government (pending a party vote) that includes a meager amount of new spending and tax cuts. Metalworkers meanwhile agreed to a two-year wage deal with employers that will set the stage for other industries. Perhaps the key takeaway: Germans don’t really want that much extra money to spend.

“It is not the start of an upward wage-price spiral in Germany.”

Carsten Brzeski, ING-Diba

Just look at IG Metall, Germany’s powerful metalworkers union, which placed demands for more flexible working hours at the heart of its negotiations in the latest round of collective bargaining. After flexing its muscle in a series of 24-hour strikes, a deal was reached in the early hours of Tuesday.

Although the union trumpeted a headline wage rise of 4.3 percent, the total deal including one-off payments and accompanying measures works out to an annual 3.5 percent over the next 27 months, according to Holger Schmieding, chief economist of Berenberg Bank. That’s well below IG Metall’s initial demand of a 6 percent hike over 12 months, but was still seen as an acceptable deal.

Gesamtmetall, the metalworkers’ employer association, says the wage pact could cost companies up to €19.8 billion ($24.3 billion) to implement. That may seem like a lot, but it’s not that much more than the average wage gains seen in previous years. “In the broader European context, the fact that this wage settlement was agreed for a period of 27 months underlines that it is not the start of an upward wage-price spiral in Germany,” said Carsten Brzeski, chief economist of ING-Diba.

Instead, what grabbed the headlines was a whole litany of other sweeteners in the union deal designed to improve work-life balance. Workers will have the right to reduce their working hours to 28 per week for up to two years (though without the salary compensation the union initially demanded). For 2019, those with children under 8 years of age will have the choice between a one-time payoff of 27.5 percent of their monthly salary or eight extra days of vacation.

Germans by law already get 24 vacation days per year, but it’s a safe bet that many will gladly take more. Indeed there’s precedent for this: Train operator Deutsche Bahn recently made a similar offer to its workers: More pay, six extra vacation days, or shorter weekly hours. Only 41 percent chose more pay.

Export other sectors to follow suit, too. Ingo Kramer, head of the broader industry association BDI, called the metalworkers deal a “future-oriented solution” that balanced the demands of employers and employees. Germany’s services sector, where unions have far less impact, can only look on somewhat ruefully.

Germany already works the fewest total annual hours on average of any developed country.

This isn’t really a new trend, either. While German companies might be productive and export-happy, their employees have never wanted to work long hours. Germany already works the fewest total annual hours on average of any developed country (1,363 hours per year, or 400 hours less than the OECD average).

The push to reduce hours even further is worrying some employers. The German machinery association VDMA said the metalworkers’ deal could “seriously hurt” small businesses, which are already struggling with skills shortages. The union deal tries to balance this out by easing restrictions on those who want to work longer hours, but the VDMA says this is “small consolation.”

If you can’t get major wage increases, perhaps the government will fill the potholes instead. The new coalition government agreed on Wednesday promises about €48 billion in new spending and €19 billion in tax cuts over the next legislative period. That’s hardly enough to lower a current-account surplus of more than 8 percent of GDP, but it is a start. Perhaps more importantly, though, there are signs that Germany is moving slightly leftward on Europe, with the new coalition government open to the idea of a common budget for the 19-nation euro zone.

Commerzbank even calculates that the government’s new spending plans could put Germany’s balanced budget in doubt. “As long as the economy is booming and interest rates remain low, a black-red coalition could avoid a general government deficit in this legislative period despite all the additional expenditure. However, it is unlikely to manage this under normal economic conditions,” the bank wrote in a research note.

In a less optimistic scenario, Commerzbank projects that Germany could wind up posting a budget deficit of 3 percent of GDP. Now that really would be something for foreign critics to write home about.

Christopher Cermak is an editor for Handelsblatt Global based in Berlin. Frank Specht of Handelsblatt contributed to this story. To contact the authors: cermak@handelsblatt.com and specht@handelsblatt.com

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