An economy fighting for its life: Rising German unemployment means there is little chance of another show of union force in the wages round. John Eisenhammer reports

IT IS a very different public sector union that opens the 1993 German wage round today from the one that so enthusiastically stormed the industrial barricades last spring. Then, the OTV, led by Monika Wulf-Mathies, gave Chancellor Helmut Kohl a bloody nose, running a bitter 10-day strike that smashed his government's declared intention of forcing wage settlements below 5 per cent.

This time round, 'Red' Monika has few such illusions, aware that her members will be lucky to come away with much above 3 per cent, below the expected rate of inflation for this year. Unemployment, that great scourge of the trade unionist's fighting spirit, has been rapidly rising in western Germany, as industrial production falls month by month and businesses retrench.

According to the statistics published yesterday by the the Federal Labour Office, there are now 2.025 million jobless in the west. The number affected by short- time working has also increased substantially, up 172,000 in December on the previous month.

That the figures in eastern Germany - 1.1 million unemployed - do not look any worse is only thanks to massive labour market support measures by the Bonn government. The economic situation remains dismal there.

Forecasting a 1 per cent decline in western German gross national product for 1993, the DIW, a Berlin-based economic think-tank, said on Wedndesday that it expected joblessness to increase from 5.1 per cent in 1992 to 7.3 per cent. On the same day, the government disclosed that industrial output in the west had slumped by 6 per cent in a year. In such a grim climate, the bargaining hand of the unions has gone limp.

There is nothing like such bad news to cheer the stern spirits occupying the executive floor of the Bundesbank. The call for modest wage deals, needed to bring down western Germany's inflation rate of over 4 per cent, has been intoned with mantra-like insistence by Helmut Schlesinger and his central council partners. Although they would not say so publicly, it is probably the key condition for an easing of Germany's monetary regime.

Which is why the Bundesbank, the German government and industry are all anxious for a swift conclusion to the pace- setting OTV negotiations. Having maintained such a tough line on wages until now, it would be difficult for the Bundesbank to make any substantial moves on rates without being able first to point to concrete improvements elsewhere.

But in another area of concern to the central bankers, the abrupt western German downturn has been less helpful. The Bundesbank has long urged the politicians in Bonn and the federal states to prune public spending in the west in order to relieve the pressure exerted by the huge subsidies being poured into the bankrupt east. The Kohl goverment has responded with much agitated talking, and done little. The western states, spending merrily on, have done even less.

As the DIW scathingly remarked in this week's report, the government threw away the best opportunity to make such spending cuts when the economy was still performing well in early 1992. Now, at a time of recession, it is much harder to force through savings that will inevitably hit the 'little man' hardest. As the 1994 general election draws closer, Chancellor Kohl's already limited appetite for unpopular measures shrinks even further. 'I am pessimistic about the chances of getting any tough public spending reforms now. It is already too late,' Commerzbank's Jurgen Pfister said.

Something will have to give. For one thing, the public spending sums no longer add up. If the government wants to avoid tax increases before 1995, when it has said they will be unavoidable, some form of saving now is inescapable. Then there is the Bundesbank. It has been hard to avoid the impression in past months that the central bank has become increasingly bloody- minded in its defence of high interest rates and that part of the reason for this lies in its confrontation with Bonn and the politicians.

Locked over the table, the monetary arm is till trying to force its fiscal opponent to give way. When Mr Schlesinger spoke on Wednesday of the calamitous effects that would follow should the Bundesbank stray from its course of correcting errors made in Germany, he was not just thinking of past inflationary wage deals. Mr Kohl and Co were very much in his mind. Having made such an issue of western public spending curbs, the Bundesbank must now insist that something has to give on this front, along with wages, for it to be able to move.

The outlook is for a frenzy of activity in the next few weeks as the Bonn government tries to concoct a package of measures that it can claim as its part of the so- called 'solidarity pact'. This agreement, involving talks between the government, opposition, business and trade unions, was originally invented by the ruling coalition as a vehicle for getting the unions to restrict wage claims, and so help industry to invest more in the east. Public spending reforms in the west - it is hoped with the blessing of the opposition Social Democrats - were meant somehow to slot into the complex formula.

In the event, however, unemployment, not the strained solidarity pact talks, will bring about wage moderation. And it is government, rather than private business, that is pledging even more money for investment in the east. The recent U-turn in favour of preserving bankrupt core industries there is an example.

As a result, the increasingly chaotic solidarity pact discussions have ended up focusing on the very issue the government had thought least about - public spending cuts. The ball is now firmly in its court, and the Bundesbank is waiting to see which way it bounces.

(Photograph omitted)