European wage spiral to provoke the ECB into hiking? Not yet.

With the European Central Bank warning that the inflation outlook “could move to the upside“, and hinting that rates could rise despite the fragility in peripheral Europe, any sign of inflation-busting wage hikes would have been a big red flag for government bond markets.  IG Metall, the German metalworkers union, had demanded a 6% wage rise at the end of last year.  Today, IG Metall and Volkswagen announced that they had agreed a settlement for 100,000 car workers worth somewhere between 3% and 3.5%.  This is obviously above the 2% ECB inflation target, and above the actual 2% German inflation rate, but taking into account productivity gains – and the strength of the car sector, which has been driven by exports (Audi, a VW brand, is ubiquitous in China, they are selling 22,000 cars per month there compared with 13,500 per month in its home market) – it looks reasonable.

The threat of high wage settlements is not over yet – the chemical union IG BCE is demanding up to 7% for its workers (we’ll find out at the end of this month).  But German trade unions have been relatively feeble in recent years.  Demands have often been halved by the time of the agreement, and this has been at the time of strong export growth and falling unemployment when you might expect workers to be gaining power.  German unemployment is 7.4%, lower than most other EU members (Spain is 20%!), the UK and US, and continues to fall.  It might be that we’ll soon approach “full” employment (although West German unemployment was as low as 3% in 1980).  It is notable that the German model is more collaborative than some – remember that in 2004 Siemens cut workers’ wages with the agreement of IG Metall.  This was a pragmatic response to the threat of competition from Eastern European factories.  Perhaps this time round the workers and unions recognise that the ECB would respond to inflation-busting pay settlements with a hike, perhaps killing the revival in the German economy (and sending the Euro higher, killing exports too)?

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Jim Leaviss

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