BERLIN — Germany’s largest trade union on Friday agreed a below-inflation pay deal in a powerhouse region, setting the benchmark for 3.9 million metal and electrical sector workers nationwide and pointing to containable wage pressures in the broader euro zone.
IG Metall agreed with employers in the southwestern state of Baden-Wuerttemberg, the home of Germany’s car industry, to raise wages by 5.2% from June 2023 and 3.3% from May 2024. In addition, a tax-free lump sum of 3,000 euros ($3,114.00) will be paid in two installments, in March 2023 and 2024.
The accord, which comes after the union called for an 8% pay rise, would have been considered exceptionally generous until recently but is now below inflation, which was 11.6% last month in Germany, Europe’s largest economy.
The pay deal, reached after five rounds of talks and a series of warning strikes staged by IG Metall to press its demands, applies within Baden-Wuerttemberg but will provide a model for other regions.
Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, said the deal should reduce the risk of large second-round effects – where supply-related cost rises begin to have an impact on wage demands and other prices.
“If anything, the IG Metall deal will remove a great deal of uncertainty over the medium-term inflation outlook,” he added.
ECB President Christine Lagarde said on Friday it would keep raising interest rates to tame inflation, even to the point where they dampen economic activity, emphasizing that rates, not balance sheet reduction, remain the ECB’s key policy tool.
Roman Zitzelsberger, IG Metall leader in the Baden-Wuerttemberg district, said the pay deal was “very decent.”
“This is a result that came about in a difficult time with a lot of strife, with a lot of wrangling and heated debates,” he told a news conference after almost 12 hours of negotiations.
Employers do not see much scope for wage increases due to the rising costs of material and energy.
Carsten Brzeski, chief economist at ING, said the deal “won’t be enough to fully offset the drop in purchasing power caused by higher inflation, but it softens the damage.”
“For the ECB, it signals that second-round effects remain dampened and that a lower, subdued inflationary pressure can last for longer than markets currently think,” he said.
Separately, German trade union verdi said on Friday it had reached a wage agreement with RWE for its roughly 18,000 employees that includes one-off 3,000 euro payments and an increase in salaries of at least 6% from Feb. 1.
Friday’s IG Metall agreement, which runs until September 2024, offers an average increase of around 8,500 euros over 24 months, including the tax-free payment, Zitzelsberger said.
Companies will have the option of bringing forward or postponing the one-off payment to move the cost burden to another calendar year if necessary.
The bargaining parties also agreed they would react quickly and flexibly if the energy crisis escalates.
Harald Marquardt, the negotiator on the employers’ side, said the compromise was “painful and just about bearable for the majority of companies.”
“We certainly swallowed a toad or two, but the others didn’t get away without swallowing toads either,” Marquardt said. ($1 = 0.9634 euros) (Reporting by Riham Alkousaa, Ilona Wissenbach and Paul Carrel; Editing by Kenneth Maxwell, Tom Hogue and Catherine Evans)