FEPS Fresh Thinking

The recent peremptory statement of the President of the European Central Bank (ECB) on the increase of wages (“the worst thing to do at the present moment”) illustrates the point at which the “TINA” (there is no alternative) mentality came into being in European economic circles. Therefore, there would only be one way to exit from the crisis. This statement reaches one of the main elements of this competitiveness pact made by the Franco-German couple: an automatic indexation of wages has to be abandoned and wage-increases should definitely be avoided in the near future. Mr Trichet thus well prepared the field for the traditional monetarist approach: their argument is that there is a high risk of inflation at the moment. Please don’t move! The reasoning behind is that Europe cannot do anything about the oil and other raw material price surge. However, Europe should do everything possible to prevent the so-called second round return, especially a raise in wages. Both employers and trade unions should have constantly in mind the key objective in the long-term perspective: price stability.

Don’t be amnesiac. First of all, the deep roots of the crisis lie in the increase in inequalities in the last 20 years at least, coupled with market deregulation. This, together with cuts in public spending (for education and healthcare for example) and tax reliefs for high incomes and wealth, favoured high rates of saving in Europe and a very high level of private debt in the US, which finally caused the crisis. Secondly, aggregate demand is determinant for the recovery of our economies. If every European Member State embarks on public spending cuts and wage moderation, the recovery cannot come from an increase in consumption and this is in particular the fact for Germany. But be aware that if austerity packages are implemented everywhere, public investment will go rapidly and substantially down. Only an increase in private investment will then be favourable to maintain output. But with wage moderation, also this seems questionable, given the poor increase in demand. Thirdly, a rise in wages does not necessarily imply a rise in inflation if there exist unused productive capacities. It could even in the medium term imply a rise in private demand for capital goods and in that case, the effect on growth and employment could be positive. This is especially the case if one considers core inflation levels. It could even lead, in the medium-term to a better rentability of capital.

It is outrageous and scandalous that the recent increase in inflation due to food and energy price increases seems to be the consequence of highly speculative activities in these markets, not reflecting a shortage in supply. When Mr Trichet, Ms Merkel and Mr Sarkozy are saying Europe can’t do anything about that and therefore there is a high risk of inflation in the whole Euro-zone and as a consequence wages should not be raised, the normal citizen is paying again TWICE: first higher prices for petrol and second therefore a diminution of his living standard. Meanwhile, the real convergence of the European economy is far from achieved. Europe is still suffering major imbalances, requiring a differentiation on the level of redistribution for different sectors and regions.

An increase in wages and public jobs creation is very beneficial for growth. Let us create jobs for growth! Growth for jobs has never worked!

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