Coalition deal: economic impact

A nationwide minimum wage of 8.50 euros was one of the most discussed issues during the five weeks of coalition talks, which ended Wednesday morning after a 17-hour meeting. The Christian Democrats (CDU), its sister party, the CSU, and the Social Democrats (SPD) reached a compromise to implement the minimum wage in 2015 with a transitional period of two years. Until the end of the transitional period employers and unions get a chance to reach collective agreements with a considerable lower hourly rate.

A nationwide minimum wage of 8.50 euros was a basic prerequisite for the SPD to join a grand coalition with the CDU/CSU. In Germany, wages and salaries have traditionally been negotiated between employers and employees through collective bargaining. Most employers and trade associations, traditionally supporters of the CDU or the CSU, reject minimum wages.

"The minimum wage is not based on economic rational logic but it is a demonstration of power by the SPD," said Micheal Hüther, director of the business-related Cologne Institute for Economic Research. "From an economic viewpoint with a minimum wage of 8.50 euros we risk job losses," he said.

Realistic wages?

Some industries, especially in the economic weak regions in East Germany, pay wages which are less than half of the future minimum wage. If the government dictates the wages, these jobs will be entirely lost, according to Hüther.

"Opponents of the minimum wage always assume that wages which are set by industry are the accurate wages. That's a very naïve idea of the market," said Gustav Horn, director of the union-friendly Macroeconomic Policy Institute (IMK) in Dusseldorf.

"Wages are also the result of market power. And it is a fact that, especially in Eastern Germany, employees have little say. That's why the wages are so low," he said.

Horn expects that the minimum wage will boost the income for several millions of employees and, therefore, tax revenues will be higher. Nevertheless he is disappointed by the coalition agreement. "I miss a clear strategy for Europe. The present strategy failed," he said. "But it is the task of the government of the biggest country in the eurozone to offer alternatives in the negotiating process. And obviously this should be part of a coalition negotiations," said Horn.

Hüther also gives low marks for the coalition agreement, but for other reasons. "The problem of the coalition talks is that no one ever asked how income, employment and economic growth develop. The only question asked was how can we redistribute the existing income and how can we justify benefits," he said.

Crumbling infrastructure

Critics on all sides agree that the government does not see the bigger picture and squabbles endlessly over details such as the female boardroom quota or higher pensions for some small groups. The new government plans to spend 23 billion euros on education and the infrastructure without raising taxes.

Gustav Horn does not see a vision for the future. In Germany there is a big problem with infrastructure. "The complaints never stop. And the answer is investing 23 billion euros in four years," he said. On average, that is a quarter-percentage point of GDP. "This is a drop in the ocean," said Horn.

Plus, the plans might never be implemented. First of all, the coalition agreement is only a declaration of intent of the future government. And secondly, the SPD's members must approve the coalition deal and could thus spell the end of the grand coalition before it has even begun.