ECB Says More Competitive Countries Should Avoid Wage Excesses

The European Central Bank said euro-area countries that are currently enjoying economic growth need to prevent wages and prices from rising too quickly.

“Excessive wage increments and a strong surge in prices need to be avoided in the more competitive countries, also during this transition phase, as they would harm real growth and lead to higher unemployment,” the ECB said in its annual report published today.

IG Metall, Germany’s largest labor union, is seeking pay increases of 5.5 percent for 3.7 million engineering and metal workers at companies including Siemens AG and Bayerische Motoren Werke AG this year. That and similar deals in recent months contrast with years of wage restraint as Germany enacted labor-market reforms that helped push down unemployment and turned the economy, Europe’s largest, into the region’s growth engine.

“Several of the euro-area economies that increased their competitiveness prior to the crisis are likely to grow faster and temporarily experience wage and price increases above the euro-area average,” the ECB said.

Countries seeking to regain competitiveness in the aftermath of the crisis “will need to take further ambitious measures,” the ECB said. “A significant genuine reduction in unit labor costs and profit margins, where a lack of competition is apparent, is particularly urgent in countries where high unemployment rates risk becoming structural and where competition is weak.”

ECB President Mario Draghi, in a foreword to the annual report, said that while 2012 had been a “challenging year” for the conduct of monetary policy, inflation expectations remain firmly anchored.

“The reintensification of the euro-area sovereign debt crisis in the first half of 2012 revealed a clear need for countries to better and more closely coordinate their economic, fiscal and financial policies to avoid unsustainable developments in individual countries jeopardizing the smooth functioning of” monetary union, Draghi said.

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