Austerity for Greeks, Welfare for the Germans

Following elections, because Angela Merkel's traditional partner, the FDP was shut out of the Bundestag, she had to form a coalition government with her traditional opposition, the SDP.

As a part of the coalition agreement she has agreed to create a minimum wage of €8.50 and a partial lowering of the retiring age to 63:

It was a "Six-Eye Negotiation" - in German, an "Unter Sechs Augen Gespraech". Three leaders, and so three pairs of eyes, sat down together in the small hours in a private room and haggled amongst themselves, eyeball to eyeball.

In the 185-page agreement which resulted, the Social Democrats (SPD) came away with a minimum wage of 8.50 euros (£7.10) an hour, uniformly applied across the country. The counter-argument had been that insisting on the minimum wage in the old East Germany would dent the region's ability to attract work.

The SPD's chief negotiator Sigmar Gabriel also got a lowering of the retirement age and some extra public spending. That may be welcomed by those outside Germany, who have argued that the country is "beggaring its neighbours" by not increasing German spending to match the country's amazing excess of exports over imports.

The SPD also secured the introduction of a minimum percentage of women on German company boards.

For her part, Chancellor Merkel got an acceptance from the SPD that its election demand of higher taxes on the rich would not happen. She also emphasised that the new government would continue to balance its budgets - there will be no move away from the belief that spending is tied to revenue.

I think that there is a fair amount consequences, some intended, and some not, to this.

First, a minimum wage of €8.50 will raise the wages of 17% of the workforce, with much of the effect in the service industry.

When one considers the impact on wages of people whose wages are just above the new minimum wage (probably about €10.00) it means that something like ¼ of the workforce will see a raise from this, which, in the long run may have negative political consequences for Merkel's CDU.

On the other side of the political consequences, the SDP's capitulation on higher taxes of the wealthy may play to the advantage of the left wing Die Linke, which is really the standard bearer of the democratic Socialism now eschewed by the "3^rd Way" movement of the SDP in recent years.

One of the artifacts of German taxation is that it is fairly regressive, and wages of the bottom 90% have decreased in recent years:

According to a DIW study published last year, wages fell in real terms for all but the top 10 percent of earners in Germany between 2005 and 2010. This had a particularly acute effect on those earning the least. "As a rule, the lowest earners spend the highest portion of their income," study co-author Karl Brenke explains.

Low-wage workers also end up spending a much higher proportion of their income on mandatory health insurance, as any income above €46,000 in annual salary is not subject to premium payments. Thus, while a senior engineer earning €150,000 a year is only required to pay 6.6 percent of his total income in social security contributions, a laborer who makes only a tenth as much ends up paying 20.7 percent.Low-wage workers also end up spending a much higher proportion of their income on mandatory health insurance, as any income above €46,000 in annual salary is not subject to premium payments. Thus, while a senior engineer earning €150,000 a year is only required to pay 6.6 percent of his total income in social security contributions, a laborer who makes only a tenth as much ends up paying 20.7 percent.

The collapse of the FDP was in part a reaction to this reality, as it is the most Thatcherite of the major parties.

Note also that this coalition agreement is exactly the opposite of the normal prescription to debt crises in the Euro zone: reductions in spending, increases in retirement age, and reductions in the minimum wage.

The next country to receive a demand of austerity from IMF and the Euro zone troika will likely highlight the inherent hypocrisy of such a demand.