This is the kind of information that makes the leaders of the European Central Bank (ECB) tremble. On Monday February 5, a union at the German airline Lufthansa called a strike, demanding a 12.5% wage increase. Two weeks earlier, Deutsche Bahn railway workers had blocked part of the country, rejecting an offer of a 13% increase. As for sector negotiations, German unions have made their demands known: +15% wages in construction, +12% in printing works, +8.5% for temporary jobs.
These showdowns on pay slips, which are found throughout Europe, are monitored like milk on fire by the ECB. Seen from a Central Bank whose mandate is to control the rise in prices, such a movement could cause the worst scenario, with a risk of an inflationary spiral: employees, whose purchasing power has fallen, demand increases, which pushes companies to raise their prices, in order to maintain their profits, which further fuels inflation…
“For the moment, wages are growing at a level well above that of long-term equilibrium”, warned Philip Lane, the chief economist of the ECB, on January 13. In the third quarter of 2023, they increased by 4.7% in the euro zone, while “compensation per employee” (a slightly different measure) increased by 5.3%. That is to say wage increases of around 5%, their highest level since the creation of the single currency. This is above the level of inflation (currently at 2.8%), which corresponds to the beginning of catching up on the purchasing power lost over the past two years.
Ambivalent message
During her last press conference, on January 25, Christine Lagarde, the president of the ECB, in turn warned that “the high level of salary increases (…) maintained strong pressure on prices ». But she added two elements: first, this pressure “started to shrink”. Then she “can’t see at the moment” the famous price-wage spiral: this is a risk, but one which has not materialized until now.
One of the explanations for this ambivalent message is the delay with which salaries are known. Typically, compensation is negotiated once a year, and, in some countries such as Germany, agreements often cover two years. And even once branch agreements have been signed, the statistics are not available for many months. This makes the ECB’s job difficult: it must decide on a possible change in interest rates without really knowing the reality of wage developments.
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