ETUC survey of recent collective bargaining agreements reveals no risk to price stability but a downward risk to growth and recovery
The European Central Bank (ECB) is engaging in a series of interest rate hikes out of fear that future wage growth might turn out to be higher than currently expected. However, an analysis by the European Trade Union Confederation (ETUC) of the most recently concluded collective bargaining agreements finds that wage dynamics are simply too weak to represent a danger of inflation, both now and in forthcoming years. By hiking interest rates, the ECB is fighting on the wrong battlefield, and ignoring the fact that wage-earners’ weak income growth may deliver a renewed setback to recovery.
Says ETUC General Secretary John Monks: “We recognise that the ECB needs to fight inflation if it is a real danger. But what we cannot accept is the objective of price stability being confused with a policy of keeping wages down at all times and at all costs.”
The ECB is pointing to upward risks to price stability coming from governments hiking value added taxes in 2007 and from workers going for higher than expected wage increases. However, the ETUC survey comes to a totally different conclusion:
Although there have been signs of some reversal of dismal trends in wage growth (for example the 3% IG-Metall agreement), there remain many other sectors and countries where wage agreements have been overly modest. Taking these different wage agreements overall, the ETUC study estimates that acceleration in average euro-area wage growth is hardly noticeable. Wage growth would accelerate from 2.3% in 2005 to 2.5% in 2006. This is well below the benchmark of inflationary wage developments which is around 3.5% (2% inflation target plus 1.5% productivity increase).
The ECB is focusing entirely on higher value added taxes causing a temporary blip in inflation in 2007. At the same time, it is ignoring the fact that higher VAT rates will also withdraw demand and activity from the economy and that this will actually push inflation back down by forcing trade unions to continue to deliver low wage growth and further disinflation.
Beyond 2007, and provided the ECB allows the recovery to develop further, wage growth will certainly accelerate. But given the fact that wage growth is too low to support a broad-based recovery and far from inflationary, this is something to be welcomed, not to be feared.
Summing up, inflationary wage developments are very unlikely in the coming two to three years and the ECB is wrong to focus on this aspect.
ETUC study on ’Collective bargaining trends and outcomes mid-2006’
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