Sluggish productivity in the euro zone, combined with rising wages, could delay the return of inflation to the 2% target, a senior European Central Bank official said on Friday.
“Productivity growth, still weak, or even negative recently, exacerbates the effects of the current strong growth in nominal wages on the unit labor costs of companies,” declared Isabel Schnabel, member of the board of directors of the BCE, in a speech in Florence.
Therefore, “this increases the risk that companies will pass on higher labor costs to consumers, which could delay the return of inflation to our 2% objective “, she added.
Combined with low productivity, wage increases continue to drive up unit labor costs and therefore priceswith the risk of a spiral effect feared by monetary officials.
“Monetary policy must remain restrictive”
In this context, “monetary policy (of the ECB) must remain restrictive” and we must “not prematurely adjust” the level of rates, she declared. Because before acting, the guardians of the euro will want to be “sure that inflation will return sustainably to the medium-term objective”.
This is to avoid having to “adopt a policy of stop and go » on rates “similar to that of the 1970s”, according to Ms. Schnabel. The decline in productivity in the euro zone, falling behind the United States, is due to the “slowness of technological diffusion”, companies in the euro zone having “failed to take advantage of the revolution in technology information and communication (ICT),” she explained.
Another element is public investment that has been “long low” in the region since the end of the sovereign debt crisis, also widening an unfavorable gap with the United States. “Growing economic nationalism, threats to our territorial security, and the growing technological gap between our economy and other advanced economies make it even more urgent the arguments in favor of strengthening the competitiveness of the euro zone », concludes the German.
In this respect, she welcomed the agreement at the end of December between the Twenty-Seven on a relaxation of European budgetary rules, which should guarantee the recovery of public finances without compromising investments.
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