Pay Politics

In Battle to Curb Deflation, ECB, Seeing Ally in Bundesbank, Endorses Push for Higher Wage in Germany

Draghi, President of the ECB and Weidmann, President of German Bundesbank shake hands with students during the Generation Euro Students' Award ceremony in Frankfurt
The European Central Bank has supported efforts by Germany's Bundesbank to encourage higher wage increases to combat the threat of deflation.
  • Why it matters

    Why it matters

    Economists outside Germany hope higher wages could help kick-start Europe’s economy. Germany, historically fearful of high inflation, is worried the new policy could cost jobs.

  • Facts

    Facts

    • After a decade of restraint, real wages in Germany are at the same level as they were in 2003.
    • The Bundesbank has said Germany’s economy can afford to see wages rise 3-3.5 percent this year, well above inflation of around 1 percent.
    • Annual inflation in the euro zone is at 0.5 percent, dangerously close to deflation territory.
  • Audio

    Audio

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When the German central bank’s chief economist last week seemed to give the all-clear for the country’s labor unions to push employers for higher wages, he likely had little idea what a ground-breaking debate he would be starting.

And yet, perhaps this was exactly Jens Ullbrich’s intention. After more than a decade of telling them to hold back, the Bundesbank is now looking to labor to help solve the crisis in the euro zone, creating an unholy alliance between one of Germany’s most conservative institutions and the traditionally left-leaning labor movement.

Last week, Bundesbank officials met with the leaders of Germany’s largest labor unions, many of whom are in the middle of negotiating with employer unions over new wage contracts for this year. Mr. Ullbrich told Spiegel magazine after the meeting that unions should feel free to push for wage increases in the order of 3-3.5 per cent. That would be well above the inflation rate, which is around 1 percent, and means workers would have plenty of extra spending money in their pockets.

The shift has come as a shock to much of Germany’s conservative economic world. For the last decade, the Bundesbank and other policymakers have been urging labor unions to be cautious in their demands – to restrain themselves for the good of the country.

Sources say the Bundesbank is not happy about Mr. Ullbrich’s comments being characterized as a carte blanche for the labor movement. But the central bank does feel it has the right to speak about prices, according to people close to its president, Jens Weidmann. The country’s economy is the envy of Europe, unemployment is at its lowest level since unification, and – most importantly – inflation is well below the central bank’s own target. That leaves room for higher wages, they argue.

The shift has come as a shock to much of Germany’s conservative economic world. For the last decade, the Bundesbank and other policymakers have been urging labor unions to be cautious in their demands – to restrain themselves for the good of the country. Wage restraint, coupled with major labor reforms implemented in the 2000s, are part of what has made Germany so successful today. Real wages have been stagnant since 2003.

The reaction suggests the Bundesbank, long a bastion of German economic thinking, is suddenly finding itself on its own. Economists, businesses and even from some quarters of the labor movement are effectively telling the central bank to butt out of the conversation.

Higher wages “will lead to higher inflation and loss of cost competitiveness in the medium term, and to a much higher unemployment in the long term,” warned Carsten-Patrick Meier, head of the research institute Kiel Economics. Thomas Mayer, the former chief economist for Deutsche Bank, in a Handelsblatt commentary said the Bundesbank is risking a loss of jobs to confront “phantom problems or to avoid reforms in other policy areas.”

Businesses are no more forthcoming. The metalworker’s employer association Gesamtmetall spoke of “dangerous advice out of Frankfurt.” Michael Waasner, who heads the electronics company Waasner , said small and medium sized businesses could be especially hard hit, because competition from abroad means they cannot afford to compensate for higher wages in other areas of their business.

Even the labor movement is not embracing its new partner in crime. While they welcome the Bundesbank’s change of heart, unions have long jealously guarded their autonomy, and few have any interest in the central bank taking an active role in the negotiations. Instead, the line has been that this is what labor has been saying all along.

The central bank’s comments are “impressive, and clearly a new philosophy. Until now, the Bundesbank has been economically blind. For them, wage agreements had always been too high, never too low,” said Reiner Hoffmann, head of the association of labor unions DGB, told Handelsblatt. “Nevertheless, wage autonomy is wage autonomy.”

While facing resistance at home, the Bundesbank will find plenty of support outside of Germany. Higher wages have been advocated for years by other countries, especially its southern neighbors that have been suffering under the weight of the euro zone’s long-running debt crisis.

The International Monetary Fund has been vocal about prodding Europe’s largest economy to compensate for the dire situation facing many other European nations. They argue Germany could help kick-start consumer spending on the continent by paying its own people more money.

The European Central Bank is also happy about the Bundesbank’s new approach. The ECB’s chief economist, Peter Praet, told Spiegel magazine over the weekend that higher wages are appropriate in a country where “”inflation is low and the labor market is in good shape.”

Higher wages could help the ECB in its own struggle to combat the danger of deflation across the continent. Annual inflation is at 0.5 per cent – too close to zero for comfort, and well below the central bank’s target rate of close to 2 per cent. Even in Germany inflation is only 1 percent, giving the monetary authorities plenty of space to act.

Indeed, policymakers are running out of ways to push prices upward. Monetary policy has been nearly exhausted – the ECB brought interest rates as low as they could in June, to 0.15 per cent. Governments have no room to spend their way out of the crisis – government debt is still rising across much of the euro zone, data from the statistics agency Eurostat showed last week.

The fact that the Bundesbank is now aligned with much of the international community had little to do with the shift, sources say. Instead, it shows the Bundesbank is open to change when the time is right.

“We don’t want to be pigeonholed,” said one Bundesbank member, who declined to be named.

Norbert Häring, Thomas Sigmund and Sebastian Prange also contributed to the story. Christopher Cermak rendered the story into English.

 

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