The ECB and Christine Lagarde now want to enforce real wage cuts for Euro area workers

by Shaun Richards

Firstly let me wish you all a Happy New Year as we advance into the first main trading day of 2023. We do have a link with the latter part of last year as I ended it by suggesting that the European Central Bank was on the cusp of a major policy error. Indeed it would be compounding its problems with inflation where it was the last of the central banks to respond to it soaring as it followed the claims of ECB President Christine Lagarde.

But we see it as a hump and a hump eventually declines, and that is what we project for 2022.

Instead it soared into double-digits and was still 10.1% in November.

We learned more on New Year’s Eve as her cheerleading for Croatia hit trouble.

So it fully deserves to be admitted to the euro area on 1 January 2023, and it is wonderful to welcome the 20th member to the family when we are celebrating the 20th anniversary of euro banknotes and coins. This is big news and a reason for all of us to celebrate!

Which led to this reply about joining the Euro.

but the most prominent ones – such as lower interest rates and more favourable borrowing terms – have become less convincing due to a change in circumstances. People worry that the euro will only spur inflation.

It is rather awkward that Croatia which is essentially joining for lower interest-rates is doing so just as the ECB is not only raising then but pumping up the rhetoric about further increases.

Interest rates are increasing for everyone. At the moment, ECB policy rates must be higher to curb inflation and bring it down to our target of 2%.

Even President Lagarde must have struggled with this claim.

We have a mandate to ensure price stability, and we have to fulfil it.

Although at 67 she is capable of claiming this.

 because it is difficult, especially for elderly citizens,

Wage Problems

The meat of the economics lecture from President Lagarde came in this bit of her interview, and the emphasis is mine.

An important factor in this respect is that we must not allow inflationary expectations to become de-anchored or wages to have an inflationary effect. We know wages are increasing, probably at a faster pace than expected, but we must be wary that they do not start fuelling inflation.

We saw Bank of England Governor Andrew Bailey crash and burn on the wage growth issue last year and you might think that someone with a partner who is a billionaire might have the sense to steer clear of this! But remember this is the person who criticised the Greeks for not paying their taxes whilst in receipt of a tax-free salary as President of the IMF.

But there is a much deeper issue as 2022 brought heavy real wage falls for the Euro area. Back on December 23rd I noted this from former ECB Vice-President Constancio.

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Eurostat just published the labour costs increases in Q3. YoY they decelerated from Q2 to Q3.The wage component increased nominally by only 2.1% and the non-wage part by 5.3% so that total labour costs were up by 2.8% in the euro area. Huge drop in real wages. Still, no spiral.

Which by my calculations meant this.

Wage growth decelerated as inflation picked up as the third quarter saw Euro area CPI rise from 8.9% in July to 9.9% in September. So we are looking at an annual rate of fall for real wages of 7%. Actually I think it is worse than that due to the way that weights for energy will under record what has taken place due to the large changes we have seen.

So the reality has been that wage growth has in fact been something of a brake on inflation. We see President Lagarde refer to the December ECB macroeconomic forecasts and it confirms that.

Wage growth, as measured by compensation per employee, is projected to increase from 4.5% in 2022 to 5.2% in 2023 before declining to 4.5% in 2024 and 3.9% in 2025 as inflation declines.

As you can see even the claimed 4.5% is well below inflation levels and it would be quite a surge from the 2.1% we noted in the period to the third quarter. Also the more timely indicator from the Bank of Ireland has suggested a fading of wage growth although from a higher level. Assuming they are right about wage growth for this year that seems set to only give a small real wage rise at best,especially compared to the 2022 fall. The idea that they have any real idea about 2024 and 25 is maybe even too much for parody.

Compared with the September projections, wage growth has been revised up by a cumulated 1.4 percentage points over 2022-24 mainly on account of higher compensation for inflation.

As you can see the numbers have changed substantially in just 3 months. So the forecasts for 2024 and 25 are really about the ECB putting out an agenda which suits it. This returns me to this part of the Lagarde statement.

we must not allow inflationary expectations to become de-anchored

Central bankers concentrate on inflation expectations because they can control them because by their very nature they are something Imagination rather appropriately sang about.

Could it be that… it’s just an illusion?Putting me back in all this confusion?Could it be that. it’s just an illusion, now?Could it be that… it’s just an illusion?

The ECB put forwards the inflation expectation for last year that it would go to 2% and it went to 10%! That is how much use they are in the real world. In fact we can take that deeper because just as there were so many claims that inflation was over in the pandemic when we saw negative oil prices for example. just as the seeds of the inflationary boom were being sown by none other than Christine Lagarde and her colleagues. Indeed using instruments like inflation-linked bonds as a guide has been distorted by all the QE bond buying which rather ironically inflated the inflation-linked bonds creating a boom and bust there which had nothing at all to do with inflation itself. Yet another market distortion was created by our central planners.

The real point is that for central bankers inflation expectations were explained by Humpty Dumpty.

“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”

As Alice points out rather presciently for central bankers.

“The question is,” said Alice, “whether you can make words mean so many different things.”


We are now at the point of what I consider to be the crux issue of our times. Central bankers have engineered one of the biggest wealth transfers ever seen. First they reduced interest-rates in the case of the ECB into negative territory. Then they introduced QE bond buying on a massive scale or trillions of Euros which boosted assets such as bonds explicitly but also house prices and equities.

Already some were worse off via higher house prices which the ECB made sure are nowhere near the inflation figures. For newer readers the Euro area inflation measure ignores owner-occupied housing inflation entirely. Then inflation made workers even worse off as real wages fell. Now the ECB is determined to stop wages exceeding inflation for any form of catch-up let alone growth.

Meanwhile many wealthy asset holders have been able to disappear over the horizon with their central bank driven gains.


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