Tags: Trichet Governments Must Keep Lid on Public-Wage Increases

Trichet: Governments Must Keep Lid on Public-Wage Increases

Wednesday, 23 Feb 2011 02:13 PM

European Central Bank President Jean-Claude Trichet said governments must set an example for the whole economy by keeping a lid on public-sector wage increases.

“Wage developments in the public sector are much more important than is generally realized,” Trichet said in Liege, Belgium, today. “The public sector must set its compensation levels with the implications for the whole economy in mind; it must be aware of its role model.”

Trichet made the comments in a speech on competitiveness in the 17-nation euro area. They come as ECB policy makers grow more nervous about inflation, which accelerated to 2.4 percent last month. Trichet said all euro nations should use the central bank’s definition of price stability — inflation of just below 2 percent over the medium term — as a yardstick.

“Unit labor costs, and therefore wage developments, after having taken due account of the labor productivity increases, need to be consistent with this,” he said. “One must not be misled into price-wage spirals by temporary inflation differentials.”

Trichet said in the euro area, government wage bills account, on average, for more than 10 percent of gross domestic product and more than 20 percent of the total compensation of employees. “It is already clear from the sheer size of this sector that public wage increases can have a very important signaling effect for private sector wage negotiations,” he said.

Divergences

In a monetary union, it is “of the essence” to avoid large economic divergences through sound economic and fiscal policies, Trichet said.

Between 1999 and 2009, public-sector wages in the euro area grew by close to 40 percent, he said. “In Germany, they grew by 19 percent; in Ireland and in Greece, they grew by more than 100 percent, roughly 50 percentage points more than private-sector wages.”

Over the same period, nominal unit labor costs grew by 24 percent in cumulative terms in the euro area as a whole. “In Austria and Germany they grew by 13 percent and 8 percent respectively; in Greece and Ireland, they grew by 34 percent and 38 percent respectively,” Trichet said.

Greece and Ireland required European Union bailouts last year after investors lost confidence in their ability to service their debt, triggering a crisis that continues to threaten the euro-area economy.

Thousands of Greeks marched through Athens today in renewed protests against government measures to cut public-sector spending.

“Our 331 million fellow citizens can rest assured that the ECB is fully faithful to its primary mandate” of ensuring price stability, Trichet said.

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European Central Bank President Jean-Claude Trichet said governments must set an example for the whole economy by keeping a lid on public-sector wage increases. Wage developments in the public sector are much more important than is generally realized, Trichet said in...
Trichet Governments Must Keep Lid on Public-Wage Increases
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2011-13-23
 

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