View from Frankfurt: German employers go for broke

The industrial relations noises emanating from the western and eastern parts of Germany are strikingly different. This is surprising, given that neither side is exactly flourishing.

In the west even the Bundesbank, an institution hardly given to lavish praise, has had to acknowledge the return to 'reasonableness' by the trade unions in their wage demands, which should average 3 per cent this year, comfortably below the expected rate of inflation. Sharply rising unemployment, now just a fraction short of the post- war high of 2.3 million, has dramatically narrowed the unions' horizons.

In the east, however, where the economy is only kept going by massive handouts from the west, and where unemployment is rampant, the talk is of strikes to defend large wage increases.

The bitterness of the dispute in the key metal and engineering sector reflects the extent of the mess into which politicians and employer associations landed themselves in the early days of unification, when nothing seemed to stand in the way of another German economic miracle. How they extract themselves from this mess could have lasting effects on the country's social consensus, the very basis of its envied industrial relations stability. In their desperation for immediate relief, some employers seem in danger of forgetting this fact.

The 1991 agreement to raise eastern wages steadily until they equal those in the west by the end of 1994 was essentially a political one. It was designed to encourage eastern workers, who were leaving en masse for the bright lights of the west, to stay put and help with the transformation of the bankrupt economy. It was also meant to give firms a basis on which to plan.

At the time, most in the west - just as today, it was western employers, unions and politicians who dictated such decisions - were confident that in two or three years eastern industry would be in such an improved state as to be able to carry the hefty wage rises that the agreement implied.

It was a disastrous miscalculation. As a consequence, of the 1.5 million people formerly employed in the engineering sector, barely 300,000 still have full-time jobs. According to the employers, eastern wages are two thirds of those in the west but productivity is little more than a third. Another consequence, although impossible to quantify, is the loss of potential investment in the east. Companies, put off by this annihilation of the region's comparative advantage, have gone elsewhere, perhaps over the border to the Czech republic, where wages are one twentieth of those in western Germany.

Faced with a deadline of 1 April for the next, staged increase of 26 per cent, which would bring eastern wages up to 82 per cent of western levels, the metal and engineering employers did something unprecedented in modern German industrial relations history - they cancelled the contract. This was presented as a measure of desperation, never to be repeated.

Instead, they are offering up to 9 per cent on 1 April, which would almost cover inflation in the east. In seeking to escape the shackles of the 1991 industry accord, the employers' federation is suddenly vaunting the merits of bringing the negotiations into the firms, so that each can get agreements suited to its circumstances. Some firms have pulled out of the employers' group altogether to escape the industry commitments.

The metal industry union, IG Metall, has called for warning strikes to begin in April. 'Now is not the time for talking, but for paying,' its leader, Franz Steinkuhler, said.

In the west, although the climate is more conciliatory, such developments have not passed unnoticed. While the main engineering employers' association, Gesamtmetall, swears almost daily that breaking the wage contract will never happen in the west, there are rebellious murmurings in the ranks.

The association of small and medium- sized firms, the Mittelstand, warns that a growing number of members want to free themselves from the burden of industry wage agreements that, they say, are always negotiated by and for the big companies.

'These are trends that need to be watched carefully, for they could prove most dangerous,' said Martin Hufner, chief economist at Bayerische Vereinsbank. 'In the short term it is beneficial, because the unions are so worried about jobs they will take lower wages. What about the future, when the situation is reversed?' In their desire for instant relief from what are seen to be excessive wage burdens, employers need to make sure they do not open the door to what Germans like to call 'English conditions'. Industry-wide agreements have been one of the fundamental strengths of the German system. 'This needs to be kept in mind,' Mr Hufner warns.

An example of the potential problems of firm bargaining is Volkswagen, which pays its workers well over the industry odds. This is just one of the many deep-seated traditions that the new boss, Ferdinand Piech, is seeking to change. Dire rumours of frightening first-quarter losses, as the German car market crumbles under the company's feet, may prove helpful.

There is some ground for suspecting that Mr Piech is doing little to counteract this flood of horror stories, as part of a very high-risk strategy of driving the firm close to disaster as the only way to smash habits and structures that he thinks are ruining it.

Something similar has being going on at Lufthansa. The figures there are even more awful, and they have been lavishly provided by repeated inside leaks. It, too, is a company where a few managers are trying to smash the mould. So far, success has been limited - the workforce made the unprecedented concession of a wage freeze for this year.

While one should not push the comparison too far, both Lufthansa and Volkswagen confront their top managers with all the problems that stem from firms that have become institutions. Volkswagen is unlike any other German car firm in that it is still para-statal. The federal government has sold its stake, but the State of Lower Saxony, where Volkswagen is based, is the main shareholder, with some 20 per cent. This is one reason management policy has always had an element of regional and social policy. Getting the workforce to work longer hours for less, and getting management to accept radical new ways is going to be no easy task for Mr Piech, which is why it looks as if he is going for broke.

(Photograph omitted)