ECB rate hike likely as wages in Germany spiral upward

By Edward Harrison On Jun 25, 2008

The wage-price spiral is now underway in core Europe as German wages are on the rise. The ECB will surely act as it has no other choice with inflation now the dominant economic concern across the Eurozone.

Today, German daily Der Spiegel has highlighted that German wages are rising at a rate not seen since the peak of the dot.com boom in 2000. Germany has long been considered the motor of the EU, core to economic policy makers. Therefore, a wage-price spiral in Germany will have large repurcussions in economic policy for the EU. While a huge plus for workers suffering with high consumer inflation, this news has got to be the nail in the coffin for interest rate hikes in the Eurozone. For Ireland and Spain, suffering housing busts, rate hikes will be a very bitter pill.

Wage settlements [in Germany] in the first half of 2008 were unusually high; According to the Economic and Social Science Institute (WSI) in Dusseldorf, workers won around 4.6 percent in wage increases.If one accounts for wage agreements from the first six months of 2008 with their varying maturities and long-term contracts from 2007, the result is a wage increase of 3.3 percent for the full year in 2008. “This is the highest increase in this decade,” according to wage policy director Reinhard Bispinck. Last year, wages and salaries increased by an average of 2.2 percent.
–Spiegel Online, 25 Jun 2008 (my translation)

The European Central Bank has a single mandate, inflation. This differs from the dual mandate of the U.S. Federal Reserve, inflation and growth.

Ultimately, this difference in mandates means that the ECB doesn’t have the luxury of balancing growth and inflation concerns in policy making decisions. With prices at decades high in the EU, the ECB will be forced to raise rates. ECB head Jean-Claude Trichet has sounded very hawkish about inflation of late. Many have speculated whether this jawboning would translate into immediate rate hikes. The incoming data increases the likelihood that it will do.