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Frankfurt am Main | 31.07.2014

President Weidmann puts the Bundesbank's position in the wage debate into perspective

"It is our duty to discuss wage developments with regard to price stability - that is something we have also done in the past. The effect of pay agreements on price developments is considerable, which makes them important for us." With these words, Bundesbank President Jens Weidmann explained in an interview with the Frankfurter Allgemeine Zeitung why the Bundesbank speaks out on the development of negotiated wages. Jens Weidmann went on to quote his predecessor, Axel Weber: "For a monetary policy that is geared towards price stability to be successful, the other players in business and politics, such as management and trade unions in their wage bargaining or the government in its fiscal policy, must also conduct themselves in a way that is consistent with price stability."

The cornerstone for assessment is and will remain the concept of monetary policy stability. As the economic environment changes, however, so the conclusions reached change over time. Bundesbank President Weidmann pointed out: "The German labour market is in considerably better shape today than in the past few years. We have close to full employment in a number of sectors and regions, and we are seeing more and more reports of labour shortages. It is therefore only natural, and also to be welcomed that wages and salaries are rising more strongly than in the days when the German economy was in much poorer shape."

Speaking to the Frankfurter Allgemeine Zeitung, he emphasised that the Bundesbank, far from making recommendations, had put the expected aggregate wage developments into perspective. This market-driven development, which "breathes" with the business cycle, is currently giving rise to an increase in negotiated wages in Germany by some 3% on average. Mr Weidmann commented that this was consistent with the Eurosystem's price stability objective. "At a rough calculation, the 3% mentioned results from just under 2% inflation in the medium term and a 1% trend increase in productivity." He added that pay agreements did, of course, have to be negotiated in the light of the specific situation in each sector.

Mr Weidmann said he also welcomed the fact that management and trade unions were gearing their wage agreements to the expected medium-term inflation rate, so that wage policy was in keeping with the objective of price stability. He told the FAZ: "Inflation is very low at present, and is expected to remain short of the target of below, but close to, 2% in the euro area for a while yet. Particularly in this situation, it's important that the wage bargaining partners do not lose sight of the price stability objective and that inflation expectations remain anchored." At the same time, Mr Weidmann warned against the excessive demands that were sometimes made of the German wage-bargaining partners: "Wage agreements that are well above the increase in productivity would be harmful to growth and employment in Germany and do a disservice to the euro area."

In his interview with the FAZ, the Bundesbank president also talked about growth prospects for the German economy and risks due to geopolitical tensions.

Interview with Jens Weidmann published in the Frankfurter Allgemeine Zeitung on 30 July 2014

"We do not interfere in wage negotiations"

Interview conducted by Philip Plickert.
Translation: Deutsche Bundesbank

Mr Weidmann, the German economy isn't gathering any real momentum. The economy stagnated in the second quarter, and the Ifo index has just fallen for the third time in succession. What is causing this slowdown?

The weaker growth in the second quarter does not come as a surprise. It is partly attributable to a statistical effect resulting from the pick-up in construction due to the mild winter. Another reason, though, is that expectations for the global economy in general, and for some countries of the euro area in particular, have deteriorated somewhat. And of course the heightened geopolitical tensions, too, are an unforeseen disruptive factor.

Is 2% growth still feasible for the year as a whole?

Our current assessment is that the result for the year is likely to fall slightly short of what we expected in our June projection, namely growth of 1.9%.

Your chief economist, Jens Ulbrich, recently recommended higher wage increases. How does he arrive at an economic scope for income distribution of 3%?

He did not make any recommendation. What he did do was put the past and the expected aggregate wage developments into a monetary policy perspective. Labour market conditions and the Eurosystem's price stability objective are of relevance in this context. The German labour market is in considerably better shape today than in the past few years. We have close to full employment in a number of sectors and regions, and we are seeing more and more reports of labour shortages. It is therefore only natural, and also to be welcomed that wages and salaries are rising more strongly than in the days when the German economy was in much poorer shape. At a rough calculation, the 3% you mentioned results from just under 2% inflation in the medium term and a 1% trend increase in productivity. However, it is also true that pay agreements are negotiated in the light of the specific situation in each sector.

It is hardly surprising that employers responded angrily to that "dangerous piece of advice". Were you surprised that some trade unionists also said they would not tolerate any "interference"? Why does the Bundesbank speak out on the matter of wage setting in any case? Surely that should be left to the wage bargaining partners?

We do not interfere in wage negotiations. That is a matter for management and trade unions. But it is our duty to discuss wage developments with regard to price stability - that is something we have also done in the past. The effect of pay agreements on price developments is considerable, which makes them important for us. As my predecessor, Axel Weber, once said: "For a monetary policy that is geared towards price stability to be successful, the other players in business and politics, such as management and trade unions in their wage bargaining or the government in its fiscal policy, must also conduct themselves in a way that is consistent with price stability." The central bank has to point this out.

The minimum wage is already going to push up costs in a number of sectors this year. How strongly will that drive consumer prices higher?

Our studies show that the effect on prices is likely to be limited at first. However, there may be significant effects in some sectors. For example, some hairdressers raised their prices appreciably after the sector-specific minimum wage was introduced.

Hans-Werner Sinn, head of Ifo, suspected that the Bundesbank was trying to stimulate the low level of inflation somewhat by recommending higher wages. Is it a preventive measure designed to ease the pressure on the European Central Bank (ECB) to embark on a problematic bond purchase programme in the name of quantitative easing?

Inflation is very low at present, and is expected to remain short of the target of below, but close to, 2% in the euro area for a while yet. Particularly in this situation, it is important that the wage bargaining partners do not lose sight of the price stability objective and that inflation expectations remain anchored. Wage agreements that are well above the increase in productivity would be harmful to growth and employment in Germany and do a disservice to the euro area. Hans-Werner Sinn said just as much himself, namely that wage increases must be in keeping with the overall economic setting. My attitude towards the purchase of government bonds by the ECB has not changed. As a central bank we should not be redistributing fiscal risks between the taxpayers of the member countries.

The ECB is already making fairly concrete preparations for a programme to revive the market for asset-backed securities (ABS), the aim being to stimulate lending to small and medium-sized enterprises in the crisis countries. Should the ECB really buy such asset-backed securities for umpteen billion euros?

The ECB Governing Council took very extensive measures in June in response to the prospect of a long period of excessively low inflation rates. We are currently working on the implementation of the long-term refinancing operations that were decided on. I think it is strange to call for new measures before those that were adopted can take effect. As far as ABS are concerned, securitisations are an instrument that can benefit the economy as a whole. Through them, loans - which is to say illiquid assets - can be converted into liquid assets and so be made accessible to a broader investor base. That's why I support the present efforts to put in place a risk-oriented regulation of ABS. ABS purchases would become a problem if it meant the central banks taking on greater risks that would ultimately be passed on to the taxpayer. It is not acceptable for banks to retain the profits from their lending business while their losses are socialised.

How long will inflation remain as low as it is at present? Is there a possibility of deflation in Europe?

We expect the euro-area inflation rate to rise once the economy picks up. But because the recovery is slow in coming, it will take a while for inflation to get close to 2% again and therefore be in keeping with our idea of price stability. I believe the risk of deflation is very low. Long-term inflation expectations are solidly anchored. There are no signs of downward wage-price spirals. As a matter of fact, the currently low inflation rates in the euro area are to a large extent the result of stagnating food and energy prices and of the necessary adjustment processes in the crisis countries.

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