After more than a year of high European inflation, which shows no signs of abating, a battle is taking place these days that may decide whether it will get out of control or return to a level that guarantees price stability. At the center of the battle is the real wage of the workers in the Eurozone, which has been sharply eroded in the past year due to inflation and demands of large workers’ organizations across the continent for price increases and the linking of wages to the index. This is to help the workers deal with the soaring price level.
Until now, and among other things from an understanding of the explosive dynamics called the “wage-price spiral” – a process in which the wage increases intended to compensate the workers for the decline in the standard of living further increase the price level and so on – large labor organizations have rejected their wage struggles, or have been content with minor adjustments. But now, when the damage to the standard of living is felt in almost every European household and inflation climbs to double-digit rates, it seems that the battle is starting to heat up.
A series of demonstrations, warning strikes and threats of widespread strikes have already taken place in recent weeks in central European countries, from Great Britain to Germany, from the Netherlands to Greece. This was, for example, the reason for the acute shortage of fuel recorded at gas stations in France in the fall (refinery workers’ strike), for public transport riots in Great Britain (railway workers’ strike), and for threats of strikes in the coming days in Greece, Germany, Spain and other countries. The workers of the health system in Madrid carried out a warning strike this week, and the strike of air transport workers in Greece disrupted air traffic in the country. At the base of most of the struggles are demands for increased wages in the collective bargaining that takes place between the workers and the employers, whether they are employers’ unions or the European governments themselves.
They fear a replay of the crisis
Economists fear a “rerun” of the wage-price spiral that happened, for example, in the US after the energy crisis of the 1970s, and which, according to most researchers, contributed to a prolonged period of high inflation. To avoid this, European governments are currently trying to prevent as much as possible that they can have permanent wage increases linked to the index, and settle for annual bonuses or approve a minor increase of a few percent in the public sector, which will not fully compensate for the damage to income.
The German government, for example, made it possible in lightning legislation earlier this year for employers to give employees an “inflation grant” of up to 3,000 euros, which would be completely tax-free for both the employee and the employer. This is the way of the government, which is not directly involved in the collective bargaining between employers and employees, to try and “push” the organizations in favor of bonuses and grants, and not to raise wages regularly. German Chancellor Olaf Schulz is fully aware of the risk of a wage-price spiral, after many years of experience as a lawyer in which he mediated collective negotiations as well as during his tenure as Minister of Labor. This was one of the reasons why he invited both the labor unions and the employers’ organizations to participate in the “emergency government summits” he convened, aimed at curbing inflation.
We are no longer satisfied with modest wage increases
But the calm dynamics in Germany seem to be changing. Although the country is far from the rates of unionized workers in the Scandinavian countries (only one in six workers is a member of a workers’ organization), it has several central and strong workers’ councils that set the tone for the entire economy.
If in recent months the organization of workers in the chemical industries and other organizations “settled” for wage increases of 2%-3%, IG METALL, the largest union in Germany and in fact in all of Europe, is sounding a completely different tone in recent weeks. The organization, whose members are close to four million workers, has already carried out several warning strikes in various district states in Germany. He now demands an annual price increase of 8% per year, which is more or less close to the rate of inflation so far. This gradually increased from 4.9% at the beginning of the year to 10.4% in October (on an annual basis).
Several thousand employees from the organization have already participated in the protest activity, including in giant companies such as Thyssenkrupp or Bosch. The employers’ organizations in the sector offered the union workers the 3,000 euro grant that the government encourages, along with an unknown increase of a few percent in wages for the next 30 months. These days another round of talks between the parties is underway. If they end without agreement, it is possible that a general strike will be declared.
“The conditions for collective bargaining now in Germany are among the most difficult ever,” the FAZ newspaper estimates. In recent decades, the workers’ organizations in Germany have accepted the erosion of their real wages due to the high standard of living in the country (the decrease in costs in the service sector). This was part of Germany’s competitive advantage in the world market. Now that the German standard of living for the unionized worker is deteriorating, attitudes may change. The Governor of the German Central Bank, Joachim Nagel, said hopefully this month, that “the payers and payers have behaved very responsibly in Germany in the last 25 years, I am confident that they will do so this time as well.”
UK: Health system on hold
A similar storm is brewing in Britain, where the cost of living crisis is among the most acute in Europe and the consumer price index rose by 10.1% in October, on the way to another estimated increase. About 300,000 brothers and sisters are threatening to strike in Britain starting next month, effectively paralyzing the health system in the country, if their demands for increased wages are not met.
In this case, the employer is the state, so the direction taken by the new government led by Rishi Sunak will serve as a signal to the entire economy. In about a week, just in time for “Black Friday” and the accompanying online shopping celebration, postal workers are also threatening a 48-hour strike. The British Royal Mail is reportedly offering its workers a 7% pay rise spread over two years, along with a one-time payment of 2% of salary. The postal workers’ organization rejects the proposal at this stage.
In Austria, the powerful metal workers’ organization, which also serves as a “marker” for other workers’ organizations, agreed this week with the industry’s employers’ organizations on a 7% wage increase for the coming year. Inflation in Austria climbed to 11% in October (compared to October 2022), but in the annualized calculation, inflation stands at 6.3% for the past year. At the beginning of the discussions, the workers demanded a 10.6% increase in wages, compared to a 3.5% offer from the employers. Four rounds of talks were required to reach an agreement.
Belgium: a mechanism for linking to an index fixed by law
In the Netherlands, the umbrella organization of the country’s trade unions (FNV) demands nothing less than a full offset of inflation, that is, full linking of wages to the index, which in the Netherlands has climbed to a level of 17%. This is undoubtedly only a starting point in the negotiations, but it reflects the “hardening” of the positions. The workers in the Netherlands look at what is happening in neighboring Belgium, where there is a mechanism for linking to a fixed index by law, one of the last remaining active in Europe (along with Luxembourg), and point out that the country has not entered into a spiral of wage inflation despite its existence.
While Denmark, Italy and many countries have abandoned linking to the index precisely because of the fear of a wage spiral, in Belgium it is still operating, under complex conditions. The mechanism established by law obliges the public sector and even the private sector to raise wages automatically if inflation rises above a certain threshold. The logic behind it is to protect the residents from a sharp drop in the standard of living, from possible poverty and from economic damage, but also to keep the economy from recession in the event of high inflation.
The system comes into action when the inflation rate exceeds 2%. With a 12.2% higher consumer price index in October compared to last year, four sweeping wage increases of 2% have already been recorded in the past year, and according to forecasts, another increase will be recorded this month. The private sector is also obliged to increase the salary, but the question of when and how depends on various complex parameters.
Although in the Netherlands the mechanism is viewed with envy, in Belgium there is criticism of it. On the one hand, the employers’ unions in the country called for him to be suspended precisely because of their increasing costs for salaries, saying that they “oblige them to raise prices even more”. According to their calculations, Belgian businesses are expected to pay employees about 5% more than French, German and Dutch businesses, which will damage their competitiveness. On the other hand, the labor unions also called in recent weeks to “open up the possibility of discussing larger wage increases” in certain sectors, and not to be satisfied with moderate wage increases in increments of 2% across the entire economy. A large demonstration initiated by the unions in the country last month called on the government to allow wage increases, pensions and welfare payments greater than those stipulated by law.
The IMF is preparing for horror scenarios
The fear of a spiral is not limited only to the wages of unionized workers, but also to pensions and welfare allowances, although in these cases the effect on consumption and the price level should be smaller. In France, Germany and other leading economies in Europe, the governments have already committed to increasing pensions in the coming year, at a rate of up to 5%.
Demonstration of workers in favor of raising wages and pension provisions last week in Paris / Photo: Reuters, Gonzalo Fuentes
The International Monetary Fund referred to the threat scenarios in a recent review and said that “currently, the risks of the appearance of a spiral are limited.” This is mainly due to the fact that inflation is much higher than the wage increases discussed, as the real wage erodes and works to lower the price level in the markets. But the change of dynamics in the coming months and in some collective bargaining cases could represent a change of direction in this respect.
According to the fund, despite the tight labor market and modest wage increases given in the past year, there is now a real wage erosion. The fund stated that “inflation expectations” play a decisive factor in the wage demands of the employees, and therefore as long as they expect a return to stable inflation of 2%, even in about two years, the risk is small. In this respect, the organization’s experts write, as long as the central banks broadcast that they are determined to reduce inflation back to the normal range and raise interest rates to support this, the fear of a spiral like the one that happened in the late 1970s in the US is not that high.
But the fund’s experts themselves warn about the following. Data published this week from the index that monitors salaries in real time based on job ads shows that the average salary in the Eurozone has already increased by 5.2% last October, compared to October last year. In Germany the increase was “abnormally high”, and stood at 7.1%. The data should increase the fear of the effects of a wage-price spiral on the depth and length of inflation, or as one of the members of the European Central Bank said this week, “we must be exceptionally alert to the issue.”