Pay restraint call falls on deaf ears in Europe
Jean-Baptiste Piggin reports on why a battle royal is developing over pay in Europe as recession begins to bite.
Calls for pay restraint as major European economies slip into recession are falling on deaf ears, with workers in numerous countries grumbling that they have gained few of the promised fruits of the last upswing.
This September, European Central Bank (ECB) President Jean-Claude Trichet has hammered out a warning against "second-round effects in price and wage setting," telling eurozone citizens to put up with high world prices for fuel and food which are beyond governments' control.
"Second-round effects" is an economist's term for a wage-price spiral: when inflation reduces real pay, workers insist on wage rises to compensate, and prices then rise because of higher labour costs. Workers then ask for another pay rise, and so on.
In Germany, the powerful metalworkers union IG Metall says it will seek a wage increase this year of between 7 and 8 percent for 3.6 million workers in industry, its highest demand in 16 years and well above the past year's 3.3 percent German consumer inflation.
Union chief Berthold Huber said factory profits rose 220 percent from 2004 to 2007 but workers gained little in the "lop-sided upswing."
IG Metall's demand is expected to influence pay-bargaining throughout the 15-nation eurozone.
Similar impatience in the working and middle classes amid perceptions that they are slipping back has emerged in Britain.
The Labour government's determination to restrain pay for public-sector workers will be challenged this autumn by teachers and civil servants, who say they are no longer prepared to live on wages eaten up by rising costs for food and fuel.
So far, Prime Minister Gordon Brown has argued that low wage demands over the past few years have contributed to economic growth and stability, low unemployment and a rise in living standards.
But after biting the bullet for most of the last 11 years of Labour rule, and facing additional challenges from the global economic downturn and the credit crunch, the trade unions are no longer prepared to toe the line.
The Trades Union Congress (TUC) voted this month for "days of action" this autumn in support of higher wages.
Rather than strikes, there will be rallies and street protests for "fair pay."
The TUC could no longer tolerate a sharp drop in living standards for members while the pay packets of bosses were going up by 20 or 30 percent, TUC secretary general Brendan Barber said.
Norbert Walter, chief economist at Deutsche Bank, Germany's biggest bank, said in an interview that the danger from pay hikes was real.
If pay were to rise sharply, "the outcome will be inflationary effects in the short term and probably a weakening in growth."
"Pay negotiators do not seem to realize that the terms of trade for nations that import energy and food have worsened," he said. Declining terms of trade mean that a nation's imports become more expensive in comparison to its exports.
Walter said the ECB would not have had to keep its interest rates so high "if we had intelligent players" who understood that big picture.
The opposing view comes from Claus Schaefer, an economist at Germany's trade-union think-tank WSI in Dusseldorf, who studies how Germans share their economic cake.
It was precisely because the world economy was weak that Germans needed to earn more and spend more.
"Domestic demand can ease the effects of an economic slowdown and make a stabilizing contribution during the slowdown phase," he said in an interview.
"In Germany and in other EU nations we have had a very restrained incomes policy. Profits have risen sharply, but wages have stagnated in nominal terms and actually fallen in real terms," Schaefer said.
Current pay claims were "a small correction to past inequalities." He dismissed fears of a wage-price spiral, which he said had only been seen in postwar Germany in the late 1960s and the early 1980s.
Deutsche Bank's Walter disagreed, saying that boosting domestic demand in times of trouble is only helpful in low-debt economies.
But Germany had high public debt and was struggling to provide for an ageing society.
"We have already eaten up our future at breakfast time," he said.
In Eastern European nations, where the post-1989 change from communism to private enterprise has brought prosperity to many, fears have also been growing among labour groups that inflation will eat up the gains.
Tough labour talks are expected in the Czech Republic this autumn as public and private-sector unions seek an 8-percent pay rise for 2009.
The Czech Chamber of Commerce called the demand unrealistic.
Koruna inflation cut real wage growth to 1.1 percent in the second quarter of 2008, the lowest in 10 years.
A recent study found Poles were earning more and have better job security but the benefits of a stronger zloty have not helped all.
The Solidarity union recently brought out at least 18,000 marchers for Poland's largest labour protest in years.
Organizers displayed shopping carts with a few basic staples, saying the items were all a minimum-wage worker or retiree could afford.
Labour rumblings have also been growing in the Baltic nations as their years of boom fade.
Latvia's government has said it will freeze public-sector wages in 2009, prompting union threats of labour action and calls for the government to resign.