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Steinmeier’s recipe deceptively seductive

By Paul Taylor
September 14, 2009

merkel-steinmeierIt was about as scintillating as a discussion among accountants, but Social Democratic challenger Frank-Walter Steinmeier outshone conservative Chancellor Angela Merkel in Germany’s only general election television debate.

True, Steinmeier failed to land the knockout punch he needed to overcome a 12-point deficit in opinion polls two weeks before the Sept. 27 vote. But he did score a points win that makes Merkel’s preferred option of a centre-right pact with the pro-business Free Democrats slightly less likely, and another glacial Grand Coalition of the two major parties more likely.  And that is concerning.

The centre-left foreign minister’s platform of a national minimum wage, executive pay curbs and switching off nuclear power is hardly a recipe to pull Europe’s biggest economy out of its deepest post-war slump.

In the current anti-capitalist mood, both leaders felt obliged to support regulating bankers’ bonuses, although Merkel made clear that, absent an improbable international accord, she opposed tough national rules that would drive business abroad.

On nuclear policy, Steinmeier has a point that investment in renewable energy could stall if Germany changes course and lets its atomic power stations keep working beyond 2020.

The idea of a minimum wage isn’t necessarily bad. The problem is the timing.

Contrary to liberal dogma, minimum wages do not necessarily destroy jobs or lower growth. Europe cannot hope to compete with China or India on pay, but only on know-how and quality. 

Britain’s introduction of an hourly pay floor in 1997 was followed by almost a decade of rapid job creation, falling unemployment and moderate inflation. But a key factor was that it was launched in an economic boom, not in the trough of a recession. The flaw in Steinmeier’s plan is the timing rather
than the measure itself.

Minimum wages do not always achieve their social objectives. The United States, one of the world’s most flexible economies, has long had a pay floor but it has failed to keep pace with living costs or reduce working poverty.

Critics often cite France, with one of the oldest and highest minimums, as an example of the perverse effects of such pay floors. Employers blame high unemployment among the young and over-50s on uneconomical costs for unskilled workers. Trade unions say too many skilled workers are bunched close to the legal minimum. High payroll taxes, inflexible hire-and-fire rules and the 35-hour work week are more of a problem than the minimum wage itself.

It is widely agreed that Germany needs to boost domestic consumption to make its economy less export-dependent. Raising the purchasing power of the low-paid would advance that aim, but not at a time of rising unemployment and economic contraction.

Merkel advocates a more gradual version. Employers and trade unions should negotiate minimum pay by industry, she said, and a low pay commission should propose a wage floor in non-unionised
sectors.

So whoever wins, Germany is creeping towards a minimum wage. But preferably not too soon to choke off the recovery.

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