German Wage Talks Break Down,
Increasing Chance of Labor Unrest

BERLIN -- Wage talks involving Germany's powerful metalworkers' union broke down Friday, increasing the chances of major labor unrest that could hamper the country's fragile economic recovery.

IG Metall, which has 2.8 million members in important sectors of the economy such as autos and machine tools, vowed to proceed with plans to hold Germany's first significant strike in seven years, after it failed to come to terms with negotiators representing employers last week.

"I don't see any chance of further negotiation," said Klaus Zwickel, the head of IG Metall. The union's membership is expected to vote on Tuesday whether to hold a strike, which could begin May 6, union officials said.

If a large strike does occur, it would come at a bad time for Europe's largest economy and for Chancellor Gerhard Schroder, who faces re-election in September.

After suffering a sharp economic downturn last year, Germany is only now beginning to show signs of rebounding. But the economy remains weak: Germany's six-leading economic think tanks are expected this week to ratchet down their collective forecast for growth this year to 0.9%, from their fall forecast of 1.3%, according to the Welt am Sonntag newspaper. Higher wages would raise costs for firms, likely forcing them to cut more jobs, economists said.

Urging Compromise

Mr. Schroder is counting on the economy recovering by September's federal vote. His conservative challenger Edmund Stoiber has been able to score points in the campaign by holding up the economic success of the state of Bavaria, where he is premier.

The unions are a traditional base of support for Mr. Schroder's Social Democrats, but union leadership has criticized the government recently for paying more attention to budget cutting than social equality.

Though both sides of the negotiating table last week made a strike sound inevitable, economists said there is still a chance it can be avoided. Mr. Schroder may well try to intervene to head off unrest. His economics minister, Werner Mueller, in a television interview Friday chastised both parties for their failure to compromise. "If there is not a result, then both sides are guilty," he said. Business leaders and prominent German economists joined in the criticism in newspaper interviews during the weekend.

Significantly higher wages "will reduce jobs in Germany," said Horst Siebert, chief economist of the Kiel World Economic Research Institute. Rudolf Rupprecht, the chief executive of Munich-based Man AG, said each percentage point increase in wages means additional annual costs of €30 million ($26.7 million) for his truck-making firm.

If a strike does occur, it would take place in the state of Baden-Wuerttemberg, home to large car makers such as DaimlerChrysler AG, and could occur elsewhere.

A Harder Line

Economists said higher wages would likely have a bigger impact on economic growth than on inflation. Since global competition has intensified in recent years, German firms probably wouldn't be able to pass on the higher wage costs to consumers by increasing prices, economists said.

Instead, they are more likely to cut costs, such as jobs. The last major strike in 1995 prompted 200,000 job cuts, according to a research report by UBS Warburg. "In the longer term, higher wages should further damage Germany's competitive position, contributing to weaker growth prospects" than in the rest of Europe, the report said.

Union officials have dismissed the complaints, arguing higher wages would help the economy by boosting consumer demand. IG Metall, one of Germany's most influential unions, has taken a harder line this year than in previous years. It originally asked for an annual wage increase of 6.5%, well in excess of the rise in inflation and productivity. Employers originally offered a 12-month increase of 2%.

A Union Demand

Following an agreement for a 3.6% wage increase in the chemical sector on Thursday, it was expected the metalworkers' union would settle for something in that range. Employers raised their offer to 3.3% for 15 months, which a negotiator said "already exceeded our pain threshold." But the union made it clear it wouldn't accept anything below 4%.

One reason for the tougher stance this year is that the union believes its workers should be compensated for having settled for moderate gains in recent years. Another likely reason is that labor leaders have to show the union is still effective, according to a report by Goldman Sachs.

Union membership has declined in the last decade; there are now more stockholders than union members in Germany. For IG Metall, "the optimal strategy seems to be an aggressive wage round," the report said. "Which in the past has tended to lift union membership."

Write to Christopher Rhoads at christopher.rhoads@wsj.com¹

Updated April 22, 2002