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German report
by Euro Reporter
2012-05-22 08:57:31
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Metal workers’ 4.3% pay settlement seen setting Benchmark

A 4.3 percent pay increase for German metal workers doesn’t pose an inflation threat even as it sets a precedent for other industries, economists said. The IG Metall union said the 13-month deal for 800,000 workers in the state of Baden-Wuerttemberg will serve as a benchmark for the 3.6 million metal workers across Germany. Economists including Holger Schmieding at Berenberg Bank said the settlement, which equates to a 4 percent gain in annual terms, will also provide a model for other industries in Europe’s largest economy.

It “surpasses the 3 percent pace which we consider compatible with both full employment and inflation below 2 percent in the long run,” said Schmieding, chief economist at Berenberg in London. “There is, however, no need to be concerned about a price-wage spiral. The service sector should get lower wage hikes, and higher wages in the metal industry are not going to be passed on to prices.”

German workers are seeking pay increases that exceed inflation as unemployment at a two-decade low bolsters their bargaining power. Wage restraint over the past decade has increased companies’ competitiveness and helped the economy to weather Europe’s sovereign debt crisis, widening the divergences between Germany and some of its euro-area partners.  “The wage increases were deserved and will help to support private consumption and thereby economic growth,” said Jens Kramer, an economist at NordLB in Hanover, Germany. Still, “there is no need to worry about inflation getting out of hand in Germany,” he said.


Germany isolated as Latin Bloc calls the shots

The package of measures includes an EMU-wide guarantee of bank deposits aimed at halting a slow bank run across southern Europe, as well as demands for full activation of the European Central Bank as a lender of last resort. They will propose eurobonds to finance an infrastructure blitz, a sort of Marshall Plan to revive confidence even if long-term benefits will take years to feed through. While the moves are couched in diplomatic language, the clear aim of French premier François Hollande, Italian premier Mario Monti, and Spanish premier Mariano Rajoy is to wrest control of the EU's governing machinery from Germany. Mr Monti said over the weekend that Mr Hollande's "entry into the game" had changed Europe's political dynamics. He has an ally "on the same wave-length".

This is clear already in a spat over the next chief of the Eurogroup, the powerful club of EMU finance ministers. Mr Hollande is balking at the coronation of German finance minister Wolfgang Schaeuble. "It is a litmus test. Hollande is flexing his muscles, showing that he is willing block the man seen as Europe's symbol of austerity," said Mads Persson from Open Europe. "The real battle is over the ECB. It is the only body that can act swiftly enough to underwrite the bond markets. But the crisis may have to get far worse before the Germans yield. It will take immediate contagion, far beyond Greece." Matt King, credit strategist at Citigroup, said Italian banks lost €160bn in deposits last year and Spanish banks lost €100bn, based on the ECB's Target2 payments data. The pattern seen in Greece, Ireland, and Portugal -- where deposits have together fallen 52pc -- is that a haemorrhage is hard to halt once it begins. "Capital flight is a self-reinforcing process. It will stop only once there is decisive policy intervention. The longer investors have to wait, the more decisive it will need to be," he said

Mr King said foreign bondholders act like sheep not wolves. They graze quietly on their coupons until disturbed. Once frightened, they flee. He expects Spain and Italy to lose another €200bn each as foreigners retreat. The coalition building against German Chancellor Angela Merkel is speckled. The British, Italians, and Poles are wary of relaxing fiscal austerity. They want the ECB to print money and take all risk of sovereign default off the table with unlimited bond purchases. The French want Keynesian spending. The Spanish want ECB action and a slower fiscal squeeze. Between them they make up five of the EU's 'Big Six'. Their shared goal is to end the contractionary policy mix that has aborted Europe's recovery and tipped the South into 1930s debt-deflation. Mrs Merkel is "extremely isolated", said Greece's radical Syriza leader Alexis Tsipras. Giles Merritt, head of the Brussels think-tank Friends of Europe, said the mood is ugly in the corridors of EU power. "The sheer anger directed against Angela Merkel is starting to shake the Germans for the first time. They are beginning to understand how deeply unpopular they have become, and how little time they have to act. The pressure from Beijing and Washington is mounting," he said.


Holocaust pressure on Germany over euro – ex-banker

Former German central banker Thilo Sarrazin, whose musings on Muslim immigrants sparked outrage in 2010, has triggered fresh controversy with a book that paints Germany as the euro zone’s hostage, forced to pay out vast sums to atone for the Holocaust. In extracts of his book “Europe doesn’t need the euro”, due to be published on Tuesday, Sarrazin argues that the euro zone is holding Germany to ransom over its past aggression, blackmailing it into agreeing to euro bonds or mutualised debt. Supporters of euro bonds in Germany “are driven by that very German reflex, that we can only finally atone for the Holocaust and World War Two when we have put all our interests and money into European hands,” Sarrazin wrote, according to extracts published in the Focus weekly. Chancellor Angela Merkel’s centre-right coalition is resisting EU pressure to back the introduction of euro bonds jointly underwritten by all euro zone members, fearing they would remove pressure on heavily indebted states such as Greece to put their finances in order.

But pressure has increased on Merkel to reconsider following Socialist Francois Hollande’s victory in France’s presidential election this month and the issue is expected to be discussed at an informal EU summit on Wednesday. Sarrazin’s new book has stirred heated debate among politicians even before it goes on sale. “Either he is speaking and writing this appalling nonsense out of conviction or he is doing it with despicable calculation,” Finance Minister Wolfgang Schaeuble told the Bild am Sonntag newspaper. A leading member of Germany’s opposition Social Democrats (SPD), Peer Steinbrueck, locked horns with Sarrazin on national television on Sunday evening, describing the theories in his 400-page book as worthless.

“It is pathetic that he is using the Holocaust to secure as much attention as possible for his euro bond theses,” Greens leader Juergen Trittin told Monday’s Die Welt newspaper. “To spend money keeping the euro is a worthwhile investment for Germany,” Trittin said. Germany’s agreement to bail out Greece reveals its “susceptibility to blackmail”, Sarrazin wrote, alluding to crimes committed by the Nazis before and during World War Two. “This politics is turning Germany into a hostage of all those in the euro zone who may in the future, for whatever reason, need help,” he said. Focus had a picture of the bespectacled, moustachioed Sarrazin, 67, on its front cover crumpling up a wad of Euros. Germany is the largest contributor to multi-billion euro bailouts of Greece, which faces a second election in just two months in June that leftists opposed to German-inspired austerity policies may win.


Germany isn’t yet ready for Euro Bonds, Kampeter says

Europe’s new budget treaty and permanent rescue facility are a first step “but not yet the final step” to the political union that Germany says is a prerequisite before it will agree to joint euro-area bonds, Deputy Finance Minister Steffen Kampeter said.

“We have always made clear that we completely oppose joint financing via euro bonds as long as fiscal policy in Europe is not integrated,” Kampeter said today in an interview with Deutschlandfunk radio. Introducing euro bonds now would mean bond interest that is “too low and takes the pressure off adjustments to the European economy.” For years, Greece had something similar to euro bonds and failed to seize the opportunity provided, “that’s why I believe that prescription comes at the wrong time and carries the wrong side-effects.”

“We need the fiscal pact, we need budget discipline, we need future-oriented investment and we need a commonly agreed policy for supply-side reforms” to make the economy more competitive, he said. “And whether in a decade or more a form of common financing is in place surely won’t be decided on Wednesday evening” when EU leaders meet.

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