Germany’s 1970s Deja-Vu Pay Deal Probably Isn’t Quite So Ominous

Germany’s 1970s Deja-Vu Pay Deal Probably Isn’t Quite So Ominous

Germany’s latest wage settlement echoes another notorious pay deal in the 1970s that heralded years of economic malaise, even though there’s less cause for alarm for now.

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(Bloomberg) — Germany’s latest wage settlement echoes another notorious pay deal in the 1970s that heralded years of economic malaise, even though there’s less cause for alarm for now.

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The new Deutsche Post AG agreement for 160,000 workers clinched last Saturday features the highest increase of recent accords, and might prove an inspiration for bigger public-sector negotiations — with possible consequences for inflation.

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At first glance, there’s surprising symmetry with a ruinous settlement in 1974. Both this month’s deal and the large public-sector agreement back then featured an initial demand for a 15% raise, and both ended up with a headline outcome in the neighborhood of 11%. 

There are other parallels too: the labor union negotiating half a century ago was a predecessor of Verdi, which did so this time. And the backdrop of an energy crisis is also familiar, as is a Social Democrat chancellor in office — now it’s Olaf Scholz, and back then it was Willy Brandt.

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The similarities may raise eyebrows at the European Central Bank, whose policymakers worry that large wage agreements might set off a spiral stoking yet more inflation in the region’s biggest economy. Domestically, there’s the further concern that big pay demands might persuade companies to shift work abroad.

But officials and economists are confident history isn’t about to repeat itself, highlighting differences with the 1970s episode. One key reason is that the 11.5% Deutsche Post deal isn’t as big as it seems: it stretches over two years and features one-time payments. Another is that it’s driven primarily by past inflation rather than expectations of more to come.

“I’m not convinced that we’re on the cusp of a wage-price spiral because it looks like people still believe that inflation will come down eventually,” said Andreas Scheuerle, an economist at Dekabank. “But we’ll see stronger wage deals for some time.” 

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It’s the threat of more pay pressures that is concerning ECB policymakers, who may raise their deposit rate by 50 basis points on Thursday to tame inflation. In Germany, gross wages and salaries rose by 5.9% last year, a pace Scheuerle predicts will roughly prevail through 2024 before demand eases in 2025. 

Deals lasting 24 months are one reason for such a protracted outlook. Wage agreements reached before consumer-price gains took off in earnest in 2022 mean workers are likely to seek more compensation at the next opportunity even if pressures have retreated by then.

The Bundesbank predicts inflation will slow to 4.1% in 2024 and 2.8% in 2025. In February, it stood at 9.3%.

Inflation expectations have remained relatively stable however. A recent survey by the European Central Bank showed them receding “significantly” three years ahead, suggesting there may be little appetite to demand big packages when price gains recede.

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In 1974, things were very different. Inflation expectations formed the basis for wage deals turning out too high. That year, the Bundesbank said in its annual report that “the increase in costs led to a compression of profits, damped the willingness to invest, put jobs at risk and in many cases may have been the final impetus for business closures.”

Attempts by Brandt to temper pay demands fell on deaf ears, and the union prevailed. What followed was calamitous, marking a turning point in the trajectory of Germany’s post-war economic miracle. 

Unemployment tripled within 18 months, and growth stalled before an annual contraction took hold in 1975. Years of stagflation ensued.

As chancellor, Scholz has been more successful so far in keeping wage deals in check. Last year, he brought together employers, unions and the Bundesbank in a rare move to jointly devise measures to ease consumer pain.

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Among the results were tax-free inflation bonuses of as much as €3,000 ($3,220) that firms can dole out until the end of 2024. Such payments feature in the Deutsche Post deal, which also includes a regular salary boost of €340 a month starting in April next year. 

When dissected, the average increase in that agreement is far lower than the headlines suggest. It amounts to 7% this year and 4% in 2024. 

That’s still noticeably higher than the ECB’s 2% target, and Bundesbank chief Joachim Nagel has warned of the risk such deals might get out of hand.

“We don’t currently see a wage-price spiral, in the sense of an additional increase in inflation through current wage agreements — if at all, it’s more a question of a price-wage spiral,” he said in January. “Even so, the risk of stronger second-round effects is high.”

The Deutsche Post deal will inform current ongoing wage talks between Verdi and public-sector workers at the federal level and municipalities. 

Negotiations in February failed, raising the prospect of strikes before new consultations later this month. Employees want a raise of at least 10.5% and no less than €500. Dekabank’s Scheuerle predicts a compromise of about 8.5%.

“Such a deal in the public sector isn’t as dangerous as in industry, where international competition is part of the equation,” he said. “But it’ll weigh on public coffers that are already stretched.”


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