An all-out strike in Germany's engineering industry was narrowly averted early yesterday when employers in the southern state of BadenWurttemberg agreed a pay deal with the powerful IG Metall union.
The deal, for a pay rise of 3.2 per cent and a one-off payment of 1 per cent of annual salary, was a clear victory for the union and employers' leaders warned that it could have a drastic effect on firms' future earnings.
Analysts agreed that the deal would serve as a benchmark for wage negotiations in other sectors but the employers' leader, Mr Dieter Hundt, warned against reading too much into the agreement.
"This deal cannot be applied to other sectors or to the German economy in general," he said.
The DAX index of German shares rose yesterday, as dealers welcomed the news that a strike had been avoided, but economists fear that higher wage bills could damage the competitiveness of German industry.
Economists said the higher-than-expected pay deal could harm the profitability of firms in Europe's largest economy and dent chances of rate cuts by the European Central Bank (ECB).
"This is not a good settlement for the industrial sector and it will make a future dent in both profitability and competitiveness," according to Mr Julian Callow, European economist at Dresdner Kleinwort Benson.
Union leaders insist that the pay rise, which is more than three times the rate of inflation in the euro area, is necessary after a prolonged period of wage restraint. The Finance Minister, Mr Oskar Lafontaine, welcomed the deal as a sensible compromise to a dispute that was resolved only after 30 hours of independent arbitration.
The rise in wage costs could intensify restructuring within German industry and increase pressure to move production abroad, where labour is cheaper. Engineering, machinery and shipbuilding may be the first sectors to feel the pinch, but analysts expect the buoyant car manufacturing sector to cope well with the higher wage bill.
Public service workers are demanding a pay rise of 5.5 per cent and their union yesterday welcomed the IG Metall pay deal as a useful benchmark figure. But Mr Werner Stumpfe, the president of the industrial firm, Gesamtmetall, claimed yesterday that the union must take responsibility for any job losses that result from the deal.
"We have agreed a pay deal against the unemployed. The victims will be those people who will lose their jobs now," he said.
