“When an economic shock comes from outside, as now and in the 1970s, there’s very little that conventional policy instruments can do to prevent it causing distress,” says Iain Begg, professor of European institutions at the London School of Economics. This kind of social pact, common in Northern Europe but decried by neoliberals as corporatist since the Reagan-Thatcher era, is well placed to minimize labor unrest and build wider support for the fair sharing of the burden of inflation. Deferred pay rises, possibly linked to certain thresholds, are a traditional German way of softening the blow to living standards. German Chancellor Olaf Scholz has shown the way forward by reviving “concerted action” roundtables with unions, employers, ministers and the central bank to discuss trade-offs between wage restraint and government support measures for the lower-paid and poor. “Nominal wages in the euro area have understandably risen somewhat in recent times, but clearly less so than in the United States, and we cannot yet speak of a wage-price spiral in the euro area, at least thus far,” said Olli Rehn, a member of the ECB’s policymaking Governing Council, which raised interest rates this month for the first time in over a decade. That partly reflects expectations that this inflation spike will be temporary and will subside next year. So far, the signs are that nominal wage inflation remains moderate at about 3 percent, and that trade unions in key countries such as Germany and France aren’t pressing inflationary wage demands. Few EU countries still automatically index wages and pensions to inflation - Belgium and Luxembourg are exceptions, and several others have partial inflation linkage for public sector pay and state pensions, but most wage-setting is left to collective bargaining and market forces.įor the ECB, keeping inflation expectations close to its 2 percent medium-term target is crucial.
One lesson from the 1970s here is avoiding trying to rigidly administer wages and prices. Moreover, many households are still sitting on savings from lockdowns and state furlough schemes, which will help them absorb the shock of a 42 percent year-on-year rise in energy prices and an 11.2 percent hike in fresh food costs. Meanwhile, unemployment is at its lowest levels in 20 years in most EU countries and the U.K., while the labor market participation rate has held up on this side of the Atlantic throughout the COVID-19 crisis. For the European Central Bank (ECB), keeping inflation expectations close to its 2 percent medium-term target is crucial | Sean Gallup/Getty Images That isn’t of comparable magnitude - or not yet, anyway. The likely fall in economic growth from the supply shock is currently estimated at 2 to 3 percentage points of EU gross domestic product, as opposed to the 8 percent drop between 19, after an Arab oil embargo quadrupled the price of oil. Central banks are more independent and credible than they were then, and the banking sector - supervised by the ECB - has far stronger capital buffers than before. The euro’s existence also means that, unlike the 1970s, there can be no competitive currency devaluation race within the EU. Hence, they are better placed to cope with the double shock of constricted oil and gas supplies and a global shortage of grain and fertilizer caused by Russia’s invasion of Ukraine. The good news, however, is that European economies are more robust and flexible than they were in the 1970s.
And there may well be more severe shocks to come for the economy and markets, such as a total shut-off of Russian gas. EU countries seem unlikely to achieve the 15 percent gas consumption savings endorsed by energy ministers last month. The bad news is that our current dependence on fossil fuels may well be harder to quit than the European Commission thinks. The core task of the European Central Bank (ECB), meanwhile, will be displaying determination to curb inflation, while taking care not to topple Europe into recession by throttling the flow of affordable credit to businesses. Preventing a wage-price spiral while trying to cushion low- and middle-income families from soaring fuel and food prices should be their top priority. The first big political test will come in heavily indebted Italy, where hard-right populists could win power in a snap election this September, following the fall of centrist Prime Minister Mario Draghi’s coalition government.Įlsewhere, governments have a longer respite before having to face voters. Daniel Danielsson, Britta Flinkfeldt, Nils-Olov Lindfors and Jonny Lundin
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