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German wage increases signal good news for Europe

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German workers fighting for higher pay don't lack supporters. Economists and politicians across Europe would like to see them spend more, and in return help take the continent's economy out of the doldrums. As things stand, unions aren't wildly enthusiastic about excessive pay hikes, and settle for quite reasonable ones. They are happy with pay rises that remain in line with inflation and productivity trends. That will increase consumers' real spending power without weakening the country's industrial base. This is better for the German economy, and also for the euro zone as a whole.

Up to about 2010, Germany went through a period of serious wage restraint, constraining domestic demand and contributing to economic and financial imbalances within the currency area. That era has come to an end. In the last two years, wages rose at the fastest pace since 1993.

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Labour contracts for 12.5 million workers are to be renegotiated in 2013. Unions are asking for pay increases of between 5 to 6.6 per cent. They will ultimately get about half that, if this week's settlement in the steel industry is any sign. The metal workers' union initially demanded a 5-per-cent rise, and agreed on 3 per cent after swift negotiations.

That deal is in line with economists' forecasts. The government's Council of Economic Experts expects wages to rise 3.2 per cent this year. With annual inflation at about 2 per cent, real spending power will increase. Due to a widespread penchant for saving rather than spending, the stimulus of domestic demand will be more limited than that number indicates. Meanwhile, real wages in the euro zone periphery are rising slower when they are not falling; so the relative competitive position of Germany's partners should improve.

German unions are well advised not to demand more. Companies must have time to adjust after a long period of wage restraint. Drastic wage hikes would be detrimental to competitiveness, jobs and ultimately growth. The euro zone can hardly afford to see its only remaining engine sputter.

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