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European Interest-Rate Policy is in Labor's Hands

For a hint of future European rate moves, look to the negotiations between industry and Germany's IG Metall labor union.

FRANKFURT -- Anyone hoping for a

European Central Bank

rate cut soon might be in for a big disappointment.

Some ECB watchers think rates will not budge before a conclusion in wage negotiations in Germany's important metals and engineering sector. And with the powerful

IG Metall

labor union demanding a 6.5% wage increase and management offering only 2.0%, some think a huge months-long battle is possible, and that the fight could spill over into other European nations.

For months, ECB President

Wim Duisenberg

has been calling on labor to accept moderate wage agreements this year. But in a speech last night he hammered hard on the subject, saying the ECB would "... carefully monitor the outcome of ongoing wage rounds."

To put his arcane central bank-speak into layman's language, he basically means: "We ain't even thinkin' about touchin' rates until IG Metall accepts a moderate wage hike."

Such concern from a central banker about a union wage agreement might sound strange to someone in the U.S., where union strength is on the wane and labor has learned to be adaptable. But in Germany, where unions are still powerful and labor inflexible, it has been quite common. The once-mighty


felt no inhibitions in the past about calling for moderate wage agreements.

And Duisenberg, basically a Bundesbank clone who is backed up by a bunch of other Bundesbank clones on the ECB

Governing Council

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, is now calling for moderate wage agreements.

Gertrud Traud, economist at

Bank Julius Baer

in Frankfurt, noted that Duisenberg also is urging governments to maintain moderate fiscal policies, just as Bundesbankers had done in the past.

"He is saying that if fiscal and wage policies are not moderate, we are not going to cut rates," she says. "He is saying we are not going to accommodate expansionary wage or fiscal policies."

Duisenberg and other ECB members want moderate wage increases for several reasons. One would be to improve the competitiveness of European companies in an increasingly ruthless global economy. Another is concern that companies forced to pay higher wages will cut back on hiring and investment. Not good for an already slowing European economy.

But probably the most important reason is the never-ending fight against inflation. Sure, inflation in much of Europe is near dead, sliding toward zero. But it's hard to imagine ECB inflation hawks like Duisenberg, Bundesbank President

Hans Tietmeyer

and others ever laying down their swords and pronouncing the battle won.

Traud says their concern about wages was justified, because wages account for two-thirds of inflation. "For the time being, inflation is no problem," she says. "But those things can change very quickly."

If IG Metall and management do not come to an agreement by Thursday, the union will be able to call scattered warning strikes beginning Friday. And if management offers nothing better by Feb. 11, the union can call general strikes.

Stefan Bergheim, economist at Merrill Lynch in Frankfurt, says, "I think there is a chance this could become a big battle."

The union feels entitled to a big wage increase this year for three major reasons. First, the union accepted moderate pay increases the past two years, 1.5% in 1997 and 2.5% last year. Second, they have strong backing from the new left-of-center government in Bonn. But perhaps most importantly, German companies over the past two years have turned handsome profits, and workers have watched stock prices soar.

Duisenberg has studiously avoided putting a number to his calls for "moderate" wage hikes. But some economists say the ECB chief and his cronies might be able to stomach an IG Metall wage rise of up to 3.0%, while anything above 4.0% would be seen as a disaster. If those numbers are correct, IG Metall will have to cut its 6.5% demand drastically to keep the ECB happy.

IG Metall, in the past billed as the biggest labor union in the world, has traditionally set the tone for labor agreements in other sectors throughout Germany (chemical, public workers, retailers, etc.). But with the Jan. 1 birth of the euro single currency, many think IG Metall this year will set the tone across all of Euroland. German wages are among the highest in Europe, and many lesser-paid workers in other regions would like to rise to the German levels.

Adolf Rosenstock, economist at Nomura International in Frankfurt, says: "That's why the IG Metall deal is so important for ECB monetary policy."