Because Europe wants wages not to be raised (too much).

The risk of recession is now over and growth forecasts are generally more optimistic than previously made. But inflation continues to erode the purchasing power of families, and public debt rates are doomed to rise as banks turn off credit taps. A set of risk factors revolving around two interrelated factors: the rise in consumer prices and the increase in interest rates by the European Central Bank. This is the conclusion from the latest economic forecasts of the EU Commission, which issued a warning in the voice of former Italian prime minister Paolo Gentiloni: raising wages too quickly could worsen the picture.

salary node

According to Gentiloni, “price pressures may be more permanent if wages increase more than currently anticipated and profit margins are not adjusted,” he explained. Such a dynamic would lead to “higher-than-expected core inflation”, which would trigger “a stronger monetary policy response with broad macroeconomic implications for investment and consumption.”

Statements that contradict not only what the unions want, but also with recent analyzes by the European Central Bank and the European Commission. As a rule, the rapid and sustained increase in wages is not seen by experts as a positive factor in the context of high inflation: in fact, payrolls that are more inflated in a short time risk increasing inflation even further. workers. In other words, a dog chasing its tail. But this academic mantra will not be suitable for reading what is going on in Europe.

A recent article by a group of economists from the ECB points out that what has driven inflation so far has been exponential growth in profits, not limited wage increases. “In the fourth quarter of 2022 unit profits increased 9.4% year-on-year and contributed more than half to domestic price pressures in that quarter, while unit labor costs increased 4.7% and contributed less than half,” the article says. An analysis parallel to the Commission working paper, in which Brussels experts argue that “the evolution of corporate profits shows that companies have room to assume wage increases” and that “the gradual depletion of excess private savings accumulated during the epidemic” warns: causes a large drop in consumption. Not forgetting the societal tensions and repercussions on the workforce that could translate into long strike seasons and worker shortages, i.e. its own target for companies.

external risks

In presenting its spring economic forecasts, the Commission instead goes back to the positions expressed by ECB chief Christine Lagarde at the start of the energy crisis: we should not put too much pressure on the accelerator when it comes to wage increases. Brussels appears to be more concerned with “external” risks to the European economy than with social tensions and a lack of manpower. “The risks associated with the external context of the EU remain high,” says Gentiloni. The Economic Commissioner worries data on the impact of rate hikes on vulnerable emerging markets.

Brussels’ hope is that the downward trend in energy prices will continue to reduce inflation and prevent the ECB from raising interest rates further. This increase has several negative effects: first of all, it makes Member States’ debt more expensive, starting with Italy. According to the Commission’s projections, our country’s interest expenditures will rise from 3.7% in 2021 to 4.1% of GDP in 2024. , but also harder to access,” said Gentiloni.

Enhance growth

Apart from these factors, the Brussels projections point to a general improvement in Europe’s growth prospects. A development that also concerns Italy: “The EU Commission’s forecasts for Italy for 2023 show the highest growth among the 3 major European economies (others Germany and France, ed.): I believe that this has not been for a long time. Italy percent in the last 3 years It has achieved a very significant growth of 12,” he said.

According to Brussels analysts, Italian GDP growth in 2023 will be around 1.2%, down from 0.8% expected in the winter forecasts. “The inflation rate is expected to fall to 6.1% this year and to 2.9% in 2024, thanks to falling energy prices,” the forecast section for Italy says. This will continue to fall to 4.5% in the current year, a deficit of 8% from 9% a year earlier in 2022, and the debt-to-GDP ratio is expected to fall from 144.4%. In 2022 to 140.3% by 2024.

Source: Today IT