The European Semester And Its Recommendations On Wages

JanssenThe Commission is still letting surplus countries off the hook.

From the moment European Economic Governance was launched, it was denounced by trade unions as being an unbalanced system. The Commission was letting surplus countries such as Germany off the hook while putting the entire burden of adjustment on workers in the ‘deficit’ countries (see here).

At the end of May, as part of the 2013 European Semester, the Commission issued a new set of country specific recommendations and new country studies. It is useful to make an update and see where we now stand on this issue of asymmetrical adjustment.

Wages are certainly once again a central part of this year’s European policy analysis and recommendations. Eight member states ‘enjoy the privilege’ of receiving a recommendation on how to set wages and reform wage bargaining systems. In addition, there are those 4 member states that do not receive a recommendation as such because they are under a Troika program. However, wage interventions are part and parcel of these Troika adjustment policies. This adds up to a total of 12 member states getting wage recommendations from the Commission. All these countries are, by the way, members of the Euro Area.

In all 12 cases except one, the Commission’s approach is to pushing countries to continue with reforms that weaken collective bargaining and wage formation systems and promote downwards wage flexibility.

Belgium and Luxembourg need to continue with ongoing efforts to reform wage indexation systems. In France and Slovenia, the statutory minimum wage is still being targeted by the Commission when it considers a minimum wage of 60% of the medium wage in France as constituting a high level. In Spain, where the trend of unit labour costs has turned  the corner but is not falling as rapidly as is the case in Greece, the Commission is insisting on an evaluation of the 2012 Spanish labour market reform by July. If necessary amendments so as to intensify the falling wage cost trend need to be presented by September. Italy is warned to better align wages with productivity by shifting towards more company level wage bargaining. Finally, trade unions in Finland are urged to go for low and moderate wage agreements in upcoming bargaining rounds and to avoid ‘pattern bargaining’ where one strong sector sets the reference for other sectors.

One reference in the Commission documents is particularly striking. It is when the Commission writes in its in-depth review of France that, even if social partners have reached an agreement to redress competitiveness, more needs to be done because Spain and Italy are meanwhile also reducing labour costs. In other words, after having pushed for wage squeezes in Spain and Italy, the Commission is now using this as an argument to depress wages in France. It seems the Commission itself is organising the wage race to the bottom!

In all of this, the Commission tends to use one counterargument. Indeed, the one exception in this whole series of country recommendations is Germany. There, it is recommended that Germany needs to ‘sustain the conditions that enable wage growth to support domestic demand’. At first sight, this would appear to be an acknowledgement from the side of the Commission that, at least as far as Germany is concerned, high(er) wage increases have a role to play in ensuring an economic recovery. With Germany accounting for an economic weight of some 30% of the entire Euro Area, this helps to rebalance the negative wage recommendations the Commission is issuing to the 11 other Euro Area member states.

Unfortunately, a closer look at the Commission language on Germany reveals a more sobering assessment.

To start with, the Commission recommendation on enabling wage growth in Germany continue by saying that ‘to this purpose, reduce high taxes and social security contributions, especially for low wage earners’. In other words, the Commission is actually not recommending to change the wage formation system in Germany itself, a system where because of the lack of a general binding minimum wage, 1 out of 5 employees are working in the low wage sector.

More becomes clear from the way the Commission recommendation is formulated. In contrast to last year’s recommendations, there’s no longer any talk about ‘creating’ the conditions for wage growth. Instead, reference is made to ‘sustaining’ the conditions for wage growth to support domestic demand. In other words, whereas in 11 other member states the Commission is actively pursuing and in some cases even imposing structural reforms to push wages down, this is not the case in Germany where the approach is simply to allow some growth of wages without strengthening the system of wages itself. (The word ‘allow’ is quoted here from the Commission’s document on frequently asked question, see here).

Finally, the Commission recommendation to cut taxes on labour is ambiguous since, in the case of social security contributions, it does not specify whether this concerns employee or employer contributions. In the past, Germany has cut employer contributions with the aim of boosting its competitive wage advantage even further. One could raise the question whether the Commission is already preparing for a situation in which, after France is following the Spanish and Italian example to cut wages, it would be again Germany’s turn to put the screw on wages? The least one can say is that the Commission recommendation, if used to cut employer instead of employee contributions, will worsen the problem of imbalances.

The French have this saying that ‘les excuses sont faits pour s’en servir‘. This appears the case with the Commission’s wage recommendation on Germany as well. It sounds wonderful but resembles more of an alibi to justify the continuing deregulation of wage systems in the rest of the Euro Area, while at the same time ducking the key problem for Germany: the stunning lack of a general binding minimum wage in a country that is at the heart of the Euro Area.