Is the Good Life Out of Reach?

Whatever the truth about inflation, the wage squeeze is real — and hard felt. In Spain, a study by the IESE business school last summer showed that household spending power has barely budged in a decade, even as the national economy has boomed. But it's in Germany, Europe's largest economy, where the pain is arguably felt the most — and where the backlash is now building.

The Berlin government is enacting a slew of programs to reduce government spending, including a plan to raise the legal retirement age by two years, to 67. The aim is to shore up the national pension system, which is under huge strain as people live longer and thus draw benefits for longer. But inside the entrance gate at VW, to the strains of an aging rock 'n' roller playing an electric guitar, hundreds of car workers in their blue and gray overalls staged a demonstration on Jan. 31 in protest. For many of them, the pension changes are just another example of workers footing the bill for the government's economic reforms — and the nation's rebound.

The Federal Statistics Office reported last month that German wages posted the smallest rise in 2006 since the office first began reporting on pan-German wages in 1995. Wages rose 1.2% last year, lower than the 1.7% rate of inflation. Hardest hit were government and municipal employees (a category that includes police, fire fighters and teachers), and workers in the building sector, whose hourly wages fell 0.8% and 0.2% respectively as a result of working longer hours for the same wage. Add to that a variety of price increases — in January, value-added tax rose to 19% from 16%, and health insurance premiums rose — and the combination stokes growing anger. "They say the economy is booming, but what good does that do us?," asks Stephan Koch, 36. "It's about time that we got something out of the upswing."

Officials at Germany's powerful IG Metall union, which dominates the automotive, machinery and steel industries, think the same way. The 2.3 million-strong union is going into this year's wage talks fighting for a 6.5% wage hike — almost quadruple the inflation rate — and protests like the one at VW are part of a nationwide campaign to increase pressure on employers and politicians. "Shareholder profits and management salaries have been rising a lot faster than the wages of factory workers in this country. There are high expectations among the rank-and-file. I think we're going to have a wage round with a lot of conflict," says Hartmut Meine, the IG Metall official for VW. Employers say that would spell disaster for Germany. Martin Kannegiesser, head of the metal industry employers' association Gesamtmetall, expects the pace of industry growth to slow this year. "We are in a phase that demands moderation," he says. "Wage policies can not be allowed to drive our prices sky high on world markets, otherwise the economic recovery will come to an end."

German popular sympathies, for the moment, lie with the union. According to a poll published by the ard public television network on Feb. 1, just 22% of Germans questioned said they felt they would personally benefit from the economic recovery, compared with 74% who said they wouldn't. When asked about IG Metall's wage demand, 44% said it was appropriate — and 5% even said it was too low.

Will such disaffection be enough to derail Europe's budding economic recovery? It's too early too tell; German wage negotiators have a history of talking tough but settling. Moreover, companies throughout Europe are flush with cash and can afford to be generous with one-time bonuses, even if they don't agree to more permanent pay hikes. But it will take more than big wage settlements in Germany and elsewhere to make Marie Pereira happy at her Bon Marché counter. She's full of grumbles: real estate prices have gone up so fast that, as a single person, "finding an affordable flat here is practically impossible." Even the simple pleasures of life are now beyond reach. "When I started smoking 10 years ago, a packet of cigarettes cost 10 francs. Now it's j5 (32 francs)," she says. "It almost makes me want to quit." That, of course, would be one salutary effect of higher consumer prices. But it does nothing to persuade Pereira — or millions like her — that the economy is as strong as the experts say it is.