In the course of the Ukraine war, prices rose significantly.
(Photo: dpa)
The German Finance Minister recently warned of a wage-price spiral that could lead to permanent inflation. Christian Lindner (FDP) therefore called on the unions to be cautious about wage demands.
In addition, the state must now save more. Lindner was dissatisfied with the suspension of the fiscal rules in 2023 proposed by the EU Commission. The governments of Europe would have to consolidate their budgets to fight inflation.
This view is problematic. The surge in inflation is primarily driven by energy price increases in connection with the war in Ukraine. There are also supply chain problems that create additional price pressure.
Wage growth, on the other hand, has recently been subdued in Germany, in 2021 it was just 1.3 percent. In the first quarter of 2022, negotiated wages increased by four percent stronger too. However, this was primarily due to high special payments and corona premiums and lagged behind the inflation rate.
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Adjusted for special payments, growth in negotiated wages of 1.1 percent in the first quarter indicates subdued wage pressure despite the good German labor market situation compared to Europe. According to the current state of knowledge, wage growth of more than three percent is not to be expected in 2023 either.
Philipp Heimberger is an economist at the Vienna Institute for International Economic Studies (wiiw).
A wage growth of 3 percent with a productivity growth of 1 percent would be compatible with the price stability target of the European Central Bank, namely an inflation of 2 percent. Even if the nominal wage settlements are likely to remain slightly higher than in the past – also against the background of the rising minimum wage – the employees have to accept a considerable loss of purchasing power with the current inflation rates.
But instead of arguing for further fiscal policy packages in Germany and Europe to cushion the economic and social hardships of increased inflation, the finance minister is advocating switching to state austerity mode across Europe. Ultimately, this would mean less fiscal policy compensation for the higher inflation for affected households.
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However, prioritizing spending and deleveraging would not solve problems in energy prices and supply chains. In addition, the experiences of the euro crisis should show that it is counterproductive to switch to savings in a recession.
Austerity policies would exacerbate the downturn already underway because of the Ukraine war. This would create additional financial and political problems for the government. Warnings of persistent inflation due to an allegedly imminent “wage-price spiral” are an economic policy own goal in the current environment.
More: Inflation: 89 percent of companies fear a wage-price spiral.