Leading Article: A dispute crucial to Germany's future

WAGE LEVELS in eastern Germany are approximately one third lower than in the former West Germany, but productivity is two-thirds lower, making unit labour costs roughly twice as high. One remarkable result is that eastern Germany's wage bill this year is expected to exceed the region's gross domestic product by no less than 47bn marks. This 'economics of the madhouse' stems from the Bonn government's disastrous decision in the spring of 1990 to exchange East German marks on a one-for-one basis with West German deutschmarks as part of the unification process; this removed the comparative advantage of much lower labour costs enjoyed elsewhere in ex-Communist eastern Europe.

The error was compounded by industry-by-industry agreements in 1991 to align wages in the 'new Lander' over three years to those in the west (partly to give east Germans an incentive not to move west). This is the issue that yesterday prompted a vote for strike action by members of Germany's largest union, IGMetall, in three east German states.

A contract agreed between the union and the relevant employers' organisation, Gesamtmetall, stipulated that east German wage levels in the metal, electrical and steel industries would reach west German levels by April 1994. That involved, inter alia, a pay increase of 26 per cent this year for metal and electrical workers and 21 per cent for those in the steel sector. Last month, with the German economy going deeper into recession, employers decided to tear up the contract, offering an increase of 9 per cent - roughly in line with inflation in the east. This move was unprecedented in the history of post-war West German labour relations, which have been well served by a tradition of bargaining between the two sides of industry, with wage contracts honoured until due for renewal. The employers' demarche has transformed the dispute into one about the principle of collective bargaining and the honouring of agreements collectively reached.

A number of more efficient companies in the east, including Volkswagen, have offered to pay the full 26 per cent. Others are leaving employers' federations because they cannot afford industry-wide deals. IGMetall suspects, probably correctly, that employers are seeking to break out of the old straitjacket of collective wage agreements. Such a release would enable each company to negotiate its own terms according to means and location, and with due regard to improvements in productivity.

Economic trends favour the employers. Wages in the nearby Czech Republic, which has a skilled labour force, are 10 per cent of Germany's. It is 30 per cent cheaper to build a BMW in the US than in Bavaria. With such handicaps, an accelerated internationalising of famous German companies looks inevitable. So does a switch from manufacturing to services: in effect, a British-style de- industrialisation. Like the German economy as a whole, the wage bargaining process needs to become significantly more flexible. A successful resolution of the IGMetall dispute must contribute to that process.