Fiscal Fitness

Seeking to Mollify the ECB, Germany’s Bundesbank Pushes Higher Wages At Home

Jens Weidmann, president of the German central bank, has pushed to increase wages.

Jens Weidmann has a major dilemma. The head of Germany’s central bank, a cautious figure, is fiercely opposed to the European Central Bank taking any further aggressive measures to bolster the euro zone’s still-flagging economy.

These arguments boiled over at the last meeting of ECB’s Governing Council, the body charged with setting interest rates and monetary policy for the euro currency zone. The meeting on June 5 in Frankfurt was a “particularly turbulent one,” said one source within the German government.

Voices were raised as Mr. Weidmann clashed with the ECB’s president, Mario Draghi, who was pushing for the central bank to begin purchasing assets from banks, a practice known as quantitative easing that has been used aggressively by central banks in the United States, Japan and Britain as their economies took a nosedive after the financial crisis in 2008.

Mr. Draghi was looking for unanimity on his board, but Mr. Weidmann wouldn’t budge. The ECB’s Governing Council eventually agreed on a compromise, in a statement after the June meeting saying the ECB was laying the groundwork to “strengthen” the market for asset-backed securities. Mr. Draghi’s central bank stopped short of saying it would start buying them.

Mr. Weidmann was stuck between a rock and a hard place – he had to give Mr. Draghi something to justify his opposition. Inflation in the euro zone fell to 0.4 per cent in July, the lowest level in nearly five years, after holding at 0.5 per cent the previous two months, according to data released Thursday. This is well below the ECB’s target of close to but below 2 percent and dangerously close to deflation. Even in Germany, consumer prices rose at an annual rate of just 0.8 per cent in June, the lowest level since 2010, according to data released Wednesday.

Mr. Weidmann saw the meeting “as an indication of just how close the ECB is to such a quantitative easing step….so close that he had to react somehow,” said Marco Wagner, an economist at the German bank Commerzbank.

And so the Bundesbank cautiously turned to another thorny issue in Germany: prodding employers to pay their employees more money. Mr. Weidmann weighed in himself this week, telling the Frankfurter Allgemeine Zeitung that higher wage packages in the order of 3 percent for this year were appropriate for Germany. He said the number is justified by a target of 2-percent inflation and productivity gains of 1 percent.

This might not seem like a bad idea, but for a country that has a historically-driven fear of inflation, the sanction for higher wages from one of its most conservative economic institutions came as a big surprise. It has sparked a major debate about the appropriate level for wages in Germany, and many economists have turned on their one-time ally, fearing higher pay will erode the country’s cherished competitiveness and export prowess.

“I have the impression that Mr. Weidmann is leaning too far out the window on this one,” said Matthias Zimmer, a parliamentary spokesman on employer-related issues within Chancellor Angela Merkel’s Christian Democratic party.



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