Germany's Industrial Worker Wage Increase Could Have Major Ripple-Effects Throughout The Eurozone

German warehouse

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Over the weekend it was reported that IG Metall, Germany’s largest and most powerful single trade union that represents millions of German industrial workers, had secured a wage increase of 4.3 per cent over the next 13 months, making it the biggest wage deal for them since 1992.This is important for a couple of reasons:

1) It aids in some much-needed rebalancing in the eurozone. SocGen chief Europe economist Klaus Baader wrote in a note to clients this morning that the deal and other wage increases “will boost private consumption growth in Germany and help rebalance the economy away from exports and towards more domestic demand.”

Furthermore, Baader noted that “stronger wage growth in Germany is also helpful in that it reduces the required wage restraint in other EMU member states which have lost competitiveness against Germany over the years since Monetary Union began in 1999.”

2) Deutsche Bank economist Darren Gibbs wrote in a note to clients this morning that the IG Metall deal was “setting the scene for higher inflation in Euroland’s biggest economy.” Indeed, Germany’s headline inflation rate stands at only 2.1 per cent in comparison to the wage increase. This is, of course, one of the mechanisms through which rebalancing occurs.

3) The wage increase is part of a larger trend in Germany of rising pay for workers. On March 31, public sector workers were awarded a 6.3 per cent wage increase through August 2013. Also, last week, according to the AP, German ministers even helped themselves to a 5.7 per cent wage increase over the same time period (marking the first rise in Cabinet member pay in 12 years). Earlier in May, another German union, ver.di, announced that it had agreed with Deutsche Telekom to a 6.5 per cent pay increase over three years.

Look out for more wage increases in Germany soon as other sectors and industries follow suit.

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