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Euro zone row gets fat pay rise for German workers

05/20/2012 | 11:27am US/Eastern
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A record-breaking pay deal will give millions of German workers their biggest rise in wages in two decades, boost consumption in Europe's biggest economy and help towards adjusting the regional imbalances that have caused severe tensions within the euro zone, analysts said on Sunday.

Germany's largest industrial union IG Metall agreed to a 4.3-percent pay rise from employers just before dawn on Saturday -- giving the 3.6 million car and engineering industry workers their biggest wage increase since a 5.4 percent deal in 1992.

The eye-catching 4.3 percent increase in the headline number will cover the 12 months from May 1 to April 30, 2013, union officials said. The agreement that ends a series of disruptive strikes takes effect from April 1, 2012 but will encompass a 13-month period. Workers will get no raise for April 2012.

The highest wage increase in two decades was agreed after German political leaders broke a long-standing, self-imposed taboo of staying out of wage talks and instead repeatedly called for strong pay rises.

Low wage growth in Germany has been identified as a source of danger in the euro zone with economists blaming it for causing imbalances that have exacerbated the sovereign debt crisis. Nominal wage growth in Germany was 1 percent on average from 2007 compared to 2.7 percent in the combined euro zone.

"I think it is a good agreement that will contribute to the rebalancing in the euro area," said Guntram Wolff, deputy director of EU policy think tank Bruegel in Brussels, after the breakthrough in the talks being closely watched across Europe.

Even though wages in the crisis-hit euro zone periphery are falling, German workers this year are savoring the benefits of a robust economy, a healthy labor market and the unusual verbal backing for higher wages from political leaders, such as Finance Minister Wolfgang Schaeuble who earlier in May said German wages should grow faster than in the rest of Europe.

"The IG Metal pay deal is another clear sign that the era of very moderate wage increases is over," said Joerg Kraemer, chief economist at Commerzbank, adding that German unit labor costs will now rise in excess of the euro zone average.

"This helps the peripheral countries to regain the loss in price competitiveness they had suffered relative to the euro-zone between the introduction of the euro and the burst of the debt bubble," he said. "But the euro zone as a whole gets weaker when Germany loses price competitiveness."

More money in the wallets of German consumers should in theory boost demand for imports from European partners. Economists believe higher labor costs in Germany could, over time, also make products manufactured elsewhere in Europe more competitive relative to those made here.

BENCHMARK DEAL

The IG Metall deal, which will cost engineering employers some 7 billion euros, came after an all-night negotiating session in the southwestern town of Sindelfingen, near Stuttgart. The sector is at the heart of the German economy.

The deal will also set a standard for other agreements even though analysts believe other unions will not be able to match the results in the thriving engineering sector, which represents Germany's leading manufacturing sector that includes carmaking powerhouses such as Volkswagen (>> Volkswagen AG), Daimler (>> Daimler AG) and BMW (>> Bayerische Motoren Werke AG).

"The deal will set a benchmark for other sectors in Germany," said Holger Schmieding, an economist at Berenberg who calculated it works out at a 3.97 percent annual pay rise if the 13th month is included. "But as few sectors are as buoyant as metal engineering with its focus on the global market, wage gains in other sectors are likely to modestly lag behind."

It exceeded the 6.3 percent pay rise over a 24-month period that Germany's 2 million public sector workers agreed to accept on March 31 that will cost taxpayers some 7 billion euros over the next two years.

The above-average pay increases in Germany come after a decade of wage deals that even failed to keep pace with the country's inflation rate of around 2 percent. The moderate agreements had improved the country's competitiveness and helped the unemployment rate fall to a two-decade low. But that put strains on the single currency.

"Higher German wage inflation is part and parcel of the internal rebalancing of Europe," Schmieding said. "The shift within the euro zone, already visible in a decline in Germany's trade surplus with other euro zone members and an export boom in the euro periphery, will become even stronger over time."

Schmieding said declining wages in countries like Greece and rising wages in Germany show that rebalancing within the euro zone is possible without causing the euro zone to lose members.

"Countries do not have to leave the euro and devalue a new currency," he said. "The facts prove that they can rebalance within the protective umbrella of the single currency."

(Editing by Greg Mahlich)

By Erik Kirschbaum

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