A reality check on German wages - no reason to panic

By: Eurointelligence ECB Watch

 

 

<h1>The German Wage Round</h1>

 

Germany’s 500,000 will receive a wage increase of 4.3% next year, of which 3.6% will come in the form of a normal wage raise, and the rest in the form of a one-off payment. You can calculate yourself to death with these numbers, since this agreement runs for 14 months, since there is a 2006 base effect, since the wage agreement also included a one-off payment, and since there has also been a nationwide cut in indirect wage costs effective at the beginning of this year. In terms of labour costs, from the perspective of the chemical industry employers, this agreement adds about 2% to the wages bill – about the ECB’s inflation target. In other words, this is not a bad deal for shareholders. They get to keep all the productivity gains.

 

The chemical industry is the second largest in the country. The largest is the engineering sector with 3.4m employees. IG Metall has been asking for 6%, and we also believe that there will be a similar settlement – less than 4% for the real wage increase plus a one-off payment to allow the union to claim that they won a deal in excess of 4%. Given the extraordinary degree of wage moderation in this sector, the high productivity gains, the cut in indirect labour costs, this is still a moderate settlement.

 

We continue to expect low settlements in the public sector and also in the services sector, which means that average labour costs in Germany will this year barely rise. German industry will even be able to improve its competitive position versus other euro area countries. Wage costs may go up a little more next year, but none of this will be dramatic.

 

The ECB, of course, has been warning about the wage round, which looks as one of the few potential sources of higher inflation in the future. We think, however, that this is largely tactical posturing. The wage round will be concluded by the end of May, and the ECB will then have a clearer idea about the inflationary impact of this year’s wage increases – or lack of. Unless new inflationary pressures emerge in the form of higher oil prices, it is difficult to see that the June ECB Council Meeting, when confronting the economic circumstances at that time, will conclude that inflationary dangers are lurking on the horizon. Most observers expect the ECB to announce the next rate increase in June, but we believe it will not be very easy for the ECB to make the case at that time. The short-term inflation outlook is relatively good, as the ECB itself admits. M3 – or rather the counterparts to M3 – may already be falling by June, without further pressure from wages, it is difficult to be convincingly paranoid about inflation. We are not saying yet that we have already reached the peak of the interest rate cycle. No, we also believe that the ECB could raise interest rates one more time. But we are becoming less certain about our central forecast.

 

 

 

<h1>Pegging to the euro becomes expensive</h1>

 

African export industries from the CFA zone have suffered from an appreciation of the euro against the dollar. CFA zone countries have a fixed exchange rate to the euro (€1  = 655.957 CFA francs). Cotton and fruit exporting companies complain that their products become too expensive as the dollar benefited from a 50% devaluation against the euro since 1994. They call for the fixed euro exchange rate to be dropped, and to change the peg towards a basket of currencies, including of the euro, the dollar and the Chinese renminbi.

 

The CFA zone is an agreement between the French treasury and 14 African countries, 12 of which are former French colonies. The agreement guarantees the free convertibility at a fixed parity between the euro and the CFA and Comorian francs. Countries of the CFA zone benefited from this agreement in times of balance of payment crisis, their growth rates were higher and their inflation rates lower than in other African countries.

 

A change in the exchange rate agreement is not trivial. It would require Council approval on the basis of a Commission recommendation and ECB consultation. Other solutions are discussed such as subsidies to the respective sectors. However, it is extremely unlikely that these subsidies will come out of the EU budget, the problem will have to be solved by the French treasury.

 

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