Monday, July 7, 2008

The Debts of the Spenders: Wage Spiral Inflation Hits Western Europe

For the past 5-6 years, Western Europeans have enjoyed unprecedented purchasing power in the strength of their leading currencies - the British Pound and the Euro. However, that strength comes at a hideous cost.

As the ECB battles inflationary pressures by raising interest rates, it is igniting the flames of a wage spiral. Wage spiral inflation is the name given to the vicious effect of wages keeping in check with inflation. While this effect is largely absent from North America because of the slow death of organized labor, it is enjoying an unprecedented surge in Western Europe where unions remain strong.

These unions have wrested generous concessions from employers to match their wages in adverse times. Who can blame them? With the cost of goods rising it is only natural for shop stewards to heed the calls of their constituents. But at the same time, Europe's strength is also proving to be its Achille's heel.

Formidably high exchange rates have cramped exporter profits and increased pressures on management to cut costs. But due to agreements made 15, 20, even 30 years ago, companies remain locked in outdated, money losing contracts. This is a leading cause of inflation. There are other pressures to be sure, such as (take your pick) a falling dollar, surging oil prices, evil speculators, etc.