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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

  • Pdf

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.

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