ECB pleas for wage restraint fall on deaf ears

Date: 09/03/2000

The 5.5% increase in pay demanded by Germany's powerful IG Metall labour union has set alarm bells ringing at the European Central Bank. But are its fears of wage-driven inflation justified? Tim Jones reports

UNTIL now, Klaus Zwickel has been a household name in Germany alone.

But if, as is widely anticipated, the European Central Bank decides to increase the cost of borrowing in the next four weeks, the televised face of the abrasive leader of the IG Metall labour union will become familiar throughout the 11-nation euro zone.

This is because IG Metall is no ordinary union and 2000 is no ordinary year. Detecting signs of economic recovery in Germany, Zwickel has lodged a demand for a 5.5% pay rise for his 3.4 million members in the metal, engineering and electrical industries together with retirement at 60 with full pension rights.

The metal workers' annual pay settlement traditionally sets the pace for wage awards throughout Germany and the ECB fears that, now that Europe's largest economy is locked in a monetary union with ten others, Zwickel's influence will extend beyond its borders.

In Italy, annual inflation has accelerated to its highest rate in two years at 2.2% and hourly wages are increasing by 0.1 of a percentage point a month.

"A 'one-size-fits-all' uniform wage policy could be fatal," warned ECB Chief Economist Otmar Issing soon after the demand was lodged. "It will be of crucial importance to avoid a convergence of nominal and real wages across countries and regions out of line with productivity; therefore, wage imitation effects should be avoided. Labour cost differences between member states should continue to reflect discrepancies in labour productivity."

The warning was implicit. At his monthly press conference last week, ECB President Wim Duisenberg was slightly more explicit. "So far, actual wage settlements, as concluded, do not give rise to concern. The major contracts still have to be concluded but there are signals, at least in the demands, that the contracts could be excessive," he said.

The key to this year's wage round - and ultimately to the level of euro-zone interest rates - will be the so-called four-week 'peace period' between the expiry of IG Metall's existing contracts and 28 March, when union members would be permitted to strike in pursuit of their demands.

"I urge employers to clarify in principle by the end of the peace period whether they support retirement at the age of 60," Zwickel told Die Welt newspaper. "If that is not clear by then, IG Metall will limit its focus to wage hikes only and call extensive warning strikes to expedite the talks and push through the wage demand." Without the early-retirement package, the wage demand will be even higher.

Zwickel claims that the employers are trying to drag out the negotiations in the hope that the more moderate IG Chemie chemical workers' union will agree a more modest deal. Unlike its metal industry counterpart, IG Chemie is calling for a 4.5%-4.8% increase in line with productivity growth.

Even though IG Metall always goes for broke at the opening of the annual negotiations - last year, Zwickel accepted 4% after initially demanding 6.5% - the ECB and German Chancellor Gerhard Schröder are certainly sweating.

Schröder has only just brokered a Bündnis für Arbeit super-deal between government, workers and management which is based on moderating wage growth in return for improved benefits. Desperate to convince Zwickel and company of their folly, the chancellor described as "exemplary" a contract signed in February for 30,000 workers in the rubber industry which committed staff to pay 0.4% of their 2.9%-3.2% pay rise into a fund to finance early retirement.

But so far, his appeals are falling on ears deaf to everything except the metal workers' lead. Germany's public-sector unions ÖTV and DAG are demanding a 5% increase for their 3.1 million members and "a more attractive form of part-time work" for those nearing retirement.

Their claim had been expected to come in at 4.5%, based on estimated productivity growth of 3% and inflation of 1.5%. The government is seeking to cap the wage increase for civil servants to the expected rate of inflation this year and next: 1.0-1.5% in 2000 and 0.5-1.0% in 2001.

The ECB's biggest concern is that the unusually high current 'headline' inflation rate - measured by the Harmonised Index of Consumer Prices (HICP) - is influencing wage demands and may help to determine settlements.

The HICP, which includes energy and food prices, has been edging up over the past few months and in January touched 2% - the ceiling for the bank's definition of 'price stability'.

The bank attributes much of this increase in the headline rate to the prodigious rise in oil prices over the past six months. In the year to January, energy prices surged 12%. The story is different once energy (which accounts for 9% of the index) and seasonal food prices are stripped out, leaving an annual increase of 1.5%. Indeed, some index components, such as telecoms tariffs and clothes prices, are falling.

Key inflationary indicators are also coming off their highs following three quarter-point interest rate increases, although they continue to show signs of significant economic activity.

The three-month average of the annual growth rates of M3 'broad money' (notes and coins in circulation and easily-cashed instruments and deposits) for November to January was 5.7%, compared with 6.0% in October to December. The annual growth rate of credit to the private sector, while still high at 9.5% in January, was down on the persistent 10%-plus rates experienced through most of last year.

But, if, as the ECB fears, wage negotiators set their eyes on the HICP, inflation could accelerate.

Recovery is already under way, with consumer and industrial confidence surveys showing distinct signs of improvement and euro-zone gross-domestic-product growth for this year now expected to be 3%-plus.

On top of this comes the weakening euro, which now appears to be stuck between 96-97 US cents. For months, Duisenberg and Issing were calm about the impact of the currency's fall against the dollar, as the euro area is well-insulated against the inflationary impact of a depreciating currency. It is the wage scene that has tipped the scales.

Ironically, the rampant US economy which has helped propel the dollar upwards and drive the euro down may be - just may be - about to change tack. Figures released last week showed that 'only' 43,000 non-farming jobs were created in the US in February - well below market expectations of a 225,000 increase - and the unemployment rate edged up to 4.1% of the potential workforce.

The euro has not reacted yet but if this turns into a trend, it might.

Similarly, if the Organisation of Petroleum Exporting Countries (OPEC) does agree to drive down the $30-per-barrel oil price - and it is under considerable pressure from Washington to do so - the environment for both Zwickel and Duisenberg will be different.

The grizzled Dutchman is not, however, holding his breath and financial market analysts are banking on another 0.25-point rate rise to 3.5% either at the ECB's meeting on 30 March or two weeks later on 13 April.

Duisenberg left people in little doubt regarding what was coming last week. "The signs are increasing that risks to price stability are growing," he said. "There can be no doubt in anyone's mind as to the direction in which monetary policy will be moving in the near future. But, on the precise timing of the move, I have as little information as you have."

Major feature. The 5.5% increase in pay demanded by Germany's powerful IG Metall labour union has set alarm bells ringing at the European Central Bank. But are its fears of wage-driven inflation justified?