German low pay deals pose risks

The dangers of Germany's low pay increases have been highlighted by one of the country's main independent research institutes, the DIW. Its forecast for 2001 points out that the pay increases in 2000 were "exceptionally moderate" and that because most of the agreements signed last year also cover 2001, the position will remain unchanged this year (see the Labour Research Department's Bargaining Report, December 2000).

The DIW believes that the moderate deals will help maintain price stability and keep inflation low. They have also helped German exporters. But it says: these advantages also have a cost. "For a long time pay agreements have fallen substantially short of what could be afforded without endangering price stability." But it adds that "the price for this strategy is that domestic demand continues to be too low". The result is higher unemployment than would otherwise be the case.

The DIW says this policy of pay moderation, which is found across Europe, should be accompanied by lower interests rates to permit higher levels of economic activity.