View from Frankfurt: Germans must drive a harder bargain

Volkswagen's proposal for a four-day week instead of a further 31,000 layoffs has provoked excited debate in the German business and political communities, caught off-guard by this revolutionary idea.

That it should be so described may be perplexing for British readers, who regard the four-day week as old hat. But it is virtually unheard of in Germany, which traditionally abhors plant bargaining in favour of an industrial relations system where sector-wide agreements regulate wages, working hours and much else besides.

Most firms, big or small, are members of their sectoral association, which negotiates on their behalf with the unions. The results are binding. As Hermann Franzen, president of the Retail Association, recently put it: 'In Germany, there is no freedom of the entrepreneur to decide on working hours.'

Volkswagen is the big exception. For historical reasons, it is not part of the contractual agreement in the engineering sector, but negotiates in-house. It can, therefore, propose a four-day week for itself. For this example to spread, however, it would need to be worked into the 1994 sectoral wage rounds, making already complex talks even more fiendish. This alone suggests that, even if VW succeeds in introducing its plan, there is unlikely to be a rash of four-day-week deals across the country.

Even so, there is something important about the debate. For the first time, IG Metall, Germany's pacesetting union, is seriously contemplating a cut in wages to accompany reduced working time. This may seem self-evident, but that is to forget the bitter struggle waged by IG Metall in the early Eighties to impose a staged reduction of the working week to 35 hours, with full pay compensation.

This proviso has been of totemic significance to the unions. Now, with unemployment increasing faster than in any other OECD country - in western Germany, it has risen by more than 25 per cent in the past year - the unions seem willing to bargain money for jobs.

These are early days, but there are encouraging signs. The four- day-week proposal by itself is no more than crisis management. But the discussions surrounding it contain the seeds of far-reaching changes, which might encourage strong growth in new jobs in the second half of the Nineties.

For this is the key issue confronting Germany. Total unemployment is expected to rise to around 4.5 million during 1994, to which one could add around 1 million on short-time work.

There are those who argue that Germany is suffering nothing worse than a severe cyclical downturn. The problems that Germany so bemoans today as killing its industry were all there in the late Eighties, when firms were making whopping profits.

When things pick up, especially abroad, the powerful German economic engine room will hum again, with the retuned eastern Germany providing extra throttle. In the view of economists at Commerzbank, there is no reason why Germany cannot repeat, or better, the miracle of the Eighties when 3 million jobs were created.

Certainly, the evidence of a dash for improved competitiveness is to be seen almost everywhere in Germany. The speed of change is impressive. But the price is also bitterly high, notably in job losses. With much of German industry only waking up recently to the full significance of lean production, there are grounds for doubting whether the mainstay sectors will ever need so many workers again.

With each cycle, the hump of hard-core unemployment has grown significantly bigger. This is a problem common to other countries, but some now feel that Germany, caught out at last by structural difficulties, may have a particularly acute version.

In its traditionally strong sectors - cars, electronic goods, chemicals, machine tools - Germany's share of world trade is stagnating or shrinking, which suggests a loss of competitiveness.

Germany has had high wages for some time, but the new problem is that many companies are finding it increasingly hard to finance this through big productivity gains. In recent years, other countries have neared Germany's productivity levels, through better training or use of new technologies, but without its wage-cost disadvantages.

This structural problem was already becoming apparent in the late Eighties, but before German managers could get to grips with it, they were riding carefree on the unification boom. Now the cares have returned with a vengeance, as they struggle to retain, or restore, the competitive edge.

Innovation is one way for a high- cost country to achieve this. But Germany is not doing as well as it used to in this area, according to Kurt Vogler-Ludwig, labour market specialist at the IFO institute in Munich. Its share in the international registration of patents is down markedly.

'The fewer the breakthroughs on the innovation side, the more the burden of competitive change will fall on wages and labour,' argues Mr Vogler-Ludwig.

This loops back to the discussion on the need for more flexibility in wage agreements and working time, and for deregulation generally.

The more flexibly businesses are able to organise their work patterns, the more they can lengthen machine running times without necessarily increasing wage costs.

Deregulation is essential if Germany's still-inefficient service sector is to expand and improve. One only has to hear the talk about easing the draconian legislation on shop opening hours to realise the potential.

The service sector in Germany accounts for 55 per cent of all employed, compared with 72 per cent in the US or 70 per cent in Britain. Deregulation is also vital for helping some of Germany's struggling high-tech industries.

These are the sectors, according to Roland Berger, one of Germany's leading management consultants, where the new jobs must come from. But there will also have to be others if the hump of hard- core unemployed is to be broken down.

This, however, will require an even more radical change in attitudes. Germany does not see a proliferation of low-wage jobs as part of its economic culture. It criticises what it calls US or British- style marginalisation.

But if the Commerzbank optimists are not right, something like this may begin to happen, especially if the service sector is to grow rapidly. The all-embracing sectoral agreements may have to make way for below-tariff wages and jobs.

As one senior official at IG Metall remarked recently: 'With unemployment at 14 per cent, you cannot continue to ride around on principles.'