Germany's IG Metall, Employers Agree on Pay Increase

By Frances Robinson

Nov. 12 (Bloomberg) -- Germany's IG Metall labor union agreed to pay increases of 4.2 percent for its 3.2 million members at companies such as Volkswagen AG and Siemens AG, lifting the threat of strike action.

The deal hammered out with the Gesamtmetall employers' association over almost 24 hours of talks is for two raises each of 2.1 percent from Feb. 1, 2009, through April 2010, the union said. Employees will also get a one-time payment of 510 euros ($639) covering the three months to January. IG Metall went into the negotiations pressing for an 8 percent pay raise, its biggest demand in 16 years.

``It's not an outcome that leaves us euphoric,'' IG Metall Chairman Berthold Huber told reporters after the talks in Sindelfingen, in the southwestern state of Baden-Wuerttemberg. ``In the recent history of the German republic, we've never seen an economic situation like this.''

Pay deals achieved by IG Metall, Germany's biggest union, set the tone for wage negotiations across the country. Today's accord reflects the darkening outlook for the German economy, Europe's biggest, as the global financial crisis triggers a worldwide slowdown.

In September, when IG Metall announced its pay demand, the government forecast was for economic growth of 1.2 percent in 2009; last month it cut that outlook to 0.2 percent. Chancellor Angela Merkel's council of economic advisers today forecast stagnation next year and a renewed increase in unemployment after four years of almost continuous decline.

`Job Security'

``With this outcome we've sought to protect job security for workers in our industry over the next couple of years,'' Gesamtmetall President Martin Kannegiesser told reporters. ``We recommend this pay agreement for all unions and states throughout Germany.'' The outlook for companies is worsening and the wage deal offers them ``flexibility,'' he said.

The deteriorating economic situation gave IG Metall an ``incentive'' to reach an agreement soon, said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt.

Given the union's initial demand, ``the wage settlement is relatively favorable for the metal sector,'' Bielmeier said in a note to investors. ``If our scenario is correct that the world economy will gather momentum from the second half of 2009 onwards, the German export sector will benefit from this development.''

Detail of Deal

IG Metall said workers will receive an across-the-board pay increase of 4.2 percent, with the 510-euro payment to be made in December. Gesamtmetall said there will be an initial pay increase of 2.1 percent on Feb. 1, 2009, followed by an additional 2.1 percent raise paid between May 1, 2009, at the earliest and Dec. 1, 2009, at the latest.

``It's important for us that companies can stagger this depending on how the economic situation develops, stage by stage,'' Kannegiesser said. There will also be a one-time payment of 122 euros to each worker in September 2009, though this may be canceled by companies on economic grounds, Gesamtmetall said.

The ``complex'' deal roughly equates to a 3.1 percent annual wage increase, Holger Schmieding, a London-based economist with Bank of America, said in a note. That's ``much less'' than both last year's pay award and the 5.1 raise secured by public-sector workers in March, he wrote.

`Spectacularly Wrong'

IG Metall, while ``still Europe's most powerful private- sector union,'' this time ``got its timing spectacularly wrong,'' Schmieding said. ``The risk that wage inflation could accelerate and spill over into higher consumer prices now looks even more remote than before.''

IG Metall, with members at companies such as steelmaker ThyssenKrupp AG and carmaker Daimler AG, had threatened to ballot for an escalation of strikes to start as soon as Nov. 17. It staged token strikes at some of Germany's biggest companies this month to press its wage claim. About 152,000 workers walked out across the country Nov. 4, the union said.

Joerg Hofmann, IG Metall's chief negotiator in Baden- Wuerttemberg, said that strikes had been averted ``at the last minute.''

Last year's wage agreement, which expired Oct. 31, was for a one-time payment of 400 euros and a pay increase in two steps, by 4.1 percent in 2007 and 1.7 percent from June 2008.

European Central Bank President Jean-Claude Trichet said last week that ``the emergence of broad-based second-round effects in price and wage-setting behavior'' risked stoking inflation. The ECB cut its benchmark interest rate by 0.5 percentage points to 3.25 percent in a bid to boost growth.

The wage agreement is a ``relatively good outcome'' after the economic outlook ``shifted the bargaining power back towards employers,'' said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London. ``This outcome should thus be viewed positively by the ECB given the very strong productivity enjoyed by that sector and should thus not be seen as inflationary.''

To contact the reporter on this story: Frances Robinson in Sindelfingen at frobinson6@bloomberg.net