Is Germany’s proposed minimum a Euro-zone win-win?

Is Germany’s proposed minimum a Euro-zone win-win?

Germany is about to set a statutory minimum wage as Angela Merkel gave in to the demands of the Social Democrats in an attempt to form a coalition government. Can this be an encouraging step towards restoring equilibrium in the Euro-zone?

On 27th November, after a long bargaining session between Angela Merkel’s conservative Christian Democratic Union (CDU) party and the center-left social democrats (SPD), a provisional government program was signed in an attempt to form a coalition government. Federal election results failed to give the CDU an outright majority in the Bundestag. The provisional deal will be put to a vote by the SPD with the members of the party deciding on the official outcome today December 14.

There are a lot of highly controversial policy tools proposed in the coalition deal. The key points on the negotiation agenda include the introduction of a minimum national wage, improvement of pension benefits, clamping down on temporary jobs, the issue of dual citizenship and transportation.

Among the above proposed measures, those concerning the labor market are the most contentious ones. Merkel was forced by the SPD to compromise on the introduction of a minimum nationwide wage of 8.50 euros per hour. Until now there was no statutory national minimum in Germany, and wages were set in a decentralized fashion via negotiation between unions and employers.

Once the deal is voted through, a national minimum wage will be introduced from 2015 onwards with some industries being temporarily exempt for a further two years. Regarding retirement, the two parties agreed on a minimum pension for people with low incomes who have paid pension contributions for 45 years or more.

A controversial policy tool, the minimum wage and its potential establishment in Germany has triggered a big debate concerning its effects on both the national economy and the country’s European partners. Voices from the camp of conservative, supply-side economics warn about the likelihood of a high number of jobs losses. It is also feared that there will be an operations exodus and investment outflow from Eastern Germany to neighboring countries that maintain lower labor costs such as Poland and Czech Republic. The country’s  competitiveness is likely to be undermined.

Those arguing in favor of the measure, though, stress its positive impact on the distribution of income and poverty reduction. They also advocate that  higher wages  will increase the purchasing power of German consumers, which in turn will boost internal demand.

Higher demand from German consumers is more than desirable by Germany’s European Union partners, who argue against the excessive surpluses that the country maintains. The argument according to which the exporting power of Germany is built on the ‘unfair’ maintenance of low wages has become commonplace among those opposing the German policy regime. In this sense, Germany’s production exceeds its consumption, and the country is running an excessive trade surplus to the detriment of its neighbors.

Nevertheless, data show that during the year 2012 and the first quarter of 2013, labor cost in Germany has considerably increased. This fact, along with the possible introduction of a minimum wage in Germany, is likely to boost investment and domestic demand and lead to higher imports from other EU countries, including  the south European ones suffering from the dept crisis and acute recession. Although such a scenario would be really good news for Europe, the overall impact of the proposed tool remains unclear.

Germany graph

Source: Eurostat database

Although some stress the negative impact of the minimum wage on job growth, the UK paradigm, for instance, shows that such a negative effect is not being confirmed. Moreover, even those who believe in the potential positive effect on rebalancing the German economy, cannot be particularly sure that this is enough to achieve equilibrium in the euro-zone. Nevertheless, the introduction of such a policy is at least an encouraging step towards the above goal, which also reveals a spirit of solidarity. To what extent this launches a new, less conservative policy era for Germany remains to be seen once the coalition government is officially formed.

Categories: Economics, Europe

About Author

Evita Souri

Evita previously worked with the European Commission, dealing with EU external relations as well as with other governmental institutions. Her expertise is in European Union affairs and the former Soviet Union countries. Evita graduated with an MSc European Political Economy from the London School of Economics (LSE). She also holds a 1st - class honours Master's degree in Economics from the Aristotle University of Thessaloniki where she also completed her undergraduate studies in Economic Science.