Draghi Tested by German Wage Hikes

European Central Bank (ECB) President Mario Draghi is in the hot seat over his continuing uniform euro zone policy aimed at controlling inflation. Low interest rates have benefited Germany to the exclusion of weaker countries, and workers there are about to reap the benefits of prosperity with substantial wage increases even as other nations force wages down and cut employment.

Bloomberg reported Wednesday that the ECB is continuing to hold its benchmark interest rate at 1%, despite the fact that the policy does not evenly benefit all euro zone members. Even as prices fall elsewhere, in Germany they are increasing, with inflation on the rise. Weak demand and tough austerity measures in debt-ridden countries are the opposite of conditions in Germany, where the economy is strong and workers are able to ask for raises that some economists say are only surprising in that they took so long.

Christian Schulz, senior economist at Berenberg Bank in London, was quoted saying, “Early signs of wage inflation and rising house prices in Germany will make some hawkish Governing Council members nervous.” But he added that it was still too early to start removing support for banks and “the overall weak economy easily warrants continued low interest rates.”

The German economy, which increased 3.7% in 2010 and 3% in 2011, is expected to continue to grow in 2012, albeit more slowly, despite the region’s economic slowdown. Other countries are not so fortunate, with Belgium, Cyprus, Greece, Italy, the Netherlands, Portugal, Spain and Slovenia all contracting. Unemployment in Germany is at a 20-year low and workers are looking for better pay.

The largest labor union in Europe, IG Metall, has about 3.6 million workers. Those workers are looking for a pay increase of 6.5%. The Ver.di union, which represents Germany’s 2 million public service workers, has negotiated a raise of 6.3% over two years—the most the union has won for its members since 1992.