The European Trade Union Confederation (ETUC) calls the decision of the European Central Bank (ECB) Governing Council to raise interest rates unnecessary and a potential risk to recovery
Today, the ECB has raised its interest rate by 25 base points in order to ward off an - imaginary - inflation danger. The ETUC expresses disappointment at the fact that the fragile nature of the present recovery has not been sufficiently taken into account. The ETUC is concerned that further interest rate increases will undermine economic confidence and growth.
” If the ECB wanted to give a warning signal to trade unions on upcoming wage negotiations by increasing its interest rate, this was totally unnecessary. Trade unions in Europe already understand the need to have wage increases compatible with the objective of price stability,” says John Monks, General Secretary of the ETUC.
The ETUC insists that it is a mistake to think that inflation is around the corner. Wages are basically sitting tight and the projected recovery is simply too modest to present any risk whatsoever to price stability. Underlying inflation is very low and projected to remain so (see accompanying graph taken from Organisation for Economic Co-operation and Development - OECD).
The recovery on the other hand is weak and fragile because it is facing several problems (falling real wages, insecurity about structural reforms, risk of restrictive fiscal policies to bring deficits down, risk of a global downturn triggered by unwinding imbalances of the US).
Withdrawing monetary stimulus from an economy in such a situation is a risky business. The ETUC warns the ECB not to undermine the recovery by engaging in a series of further interest rates hikes.
Source: OECD Economic Outlook, November 2005
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