How Germany wants to prevent a wage-price spiral

What's going on? 

Next Monday, Chancellor Olaf Scholz (SPD) wants to meet with employers and trade unions to discuss the state budget and rising cost of living.

With inflation currently hitting 7.9 percent in Germany, the government is concerned that the trade unions could try to negotiate significant wage increases over the coming months. In some cases, this can fuel a process known as a wage-price spiral - because companies then put up their prices yet again to deal with the rising cost of labour. 

In an effort to stop this happening, Scholz is set to pitch the idea of a one-off pay-rise instead of numerous pay increases over time. The state could make these even more lucrative by keeping the one-off payments tax-free for employees. Scholz's party, the governing Social Democrats (SPD), believe that this would not only cushion the impact of inflation on workers but also help to prevent endless price hikes in the future.  

READ ALSO: How Germany’s soaring inflation is hitting household budgets

What are the unions and employers saying? 

So far, both unionists and business owners have been cautious about the idea in the run-up to the Monday meeting. Both sides have pointed out that collective bargaining (negotiations between unions and businesses) should be autonomous: wage agreements are not agreed politically, they say, but are a matter for employers and trade unions.

In an interview with the Bayerischer Rundfunk, Frank Werneke, head of Verdi, poured cold water on the idea of one-off payments. "We have to make sure that these permanently rising prices are also converted and transformed into permanently effective wage increases," he said.

One-off payments are simply one-off measures that do not lead to a permanent increase in wages, according to the IG Metall trade union, which recently negotiated a 6.5 percent pay increase for its workers. The police union has also expressed a similar view. 

Do economists think this is a good idea? 

Not really. The President of the German Institute for Economic Research, Marcel Fratzscher, has already spoken out against the move. He argues that a restricted one-off payment would mean workers would bear the brunt of the current crisis. 

Clemens Fuest, President of the Munich-based Ifo Institute, voiced concerns that even a one-off wage increase could lead to prices shooting up regardless. "There is a danger that this will lead to strong windfall effects and that wage increases will not be much lower (than they otherwise would)," he said. 

Fuest believes that the government should play a role in combatting inflation, but says this could partly be done via the European Central Bank. If the ECB raises interest rates decisively, this will automatically make energy imports cheaper by driving up the value of the euro. 

It's also worth mentioning that there is some dispute about whether wages are really driving the current cost-of-living crisis. Some economists have argued that prices are going up because companies want to profit from higher margins while certain products are scarce on the global market. This would explain why profits are also high - which would debunk the argument that companies are raising their prices primarily to cover their costs. 

READ ALSO: Is Germany planning more energy relief measures?

What other proposals are on the table? 

Though Scholz appears to have support from the Green Party for his proposal, the SPD's third coalition partner - the pro-business FDP - has put forward an alternative idea.

Christian Dürr, the FDP's parliamentary faction leader, thinks adjusting tax rates in line with inflation would be a more sensible option for relieving workers. In any case, there are bound to be intensive negotiations taking place even before the government meets with the unions and employers on Monday.