Inflation is a number. But addressing it is not just a technical issue, best left to (usually male) economists.
There will not have been many all-women panels discussing the cost-of-living crisis in Europe since it erupted but last week—albeit courtesy of the unfortunate illness on the day of the MEP and economist Paul Tang—that is what happened, in the latest Social Europe Talk session supported by the Friedrich Ebert Stiftung European Union office.
The online panel comprised Liina Carr, confederal secretary of the European Trade Union Confederation; Georgia Kaplanoglou, professor of public finance at the National and Kapodistrian University of Athens, and Philippa Sigl-Glöckner, director of the think tank Dezernat Zukunft in Germany. Perhaps unsurprisingly, the discussion was more complex and panoramic than has been evident elsewhere, such as in the single-minded focus of the European Central Bank on the lever it wields—the interest rate.
The discussion went through three phases. First was the causes of the crisis of inflation. Second was the short-to-medium responses required. Finally came how to face the long-term challenges of tackling the underlying deficiencies.
No one doubts the severity of the cost-of-living crisis, affecting Europeans and even moreso the rest of the world’s population, especially the most vulnerable. How does it differ from the ‘stagflation’—stagnation plus inflation—of the 1970s? Both have been precipitated by war: the oil embargo introduced by the Arab oil-producing states in reaction against the United States’ support for Israel in the Yom Kippur War, and February’s invasion of Ukraine with the consequent European sanctions against Russia. But what are the fundamental causes of inflation today and how are these distinct from half a century ago?
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Philippa Sigl-Glöckner highlighted the similarity before focusing on the differences: ‘It’s pretty similar in the sense that we have a cost shock, and we have to be very clear in Europe that inflation is driven by an external cost shock by energy. It’s more gas than oil, but it is that. I know that there were calculations trying to show that it’s excessive demand, and then we get a wage-price spiral, but we see none of that.’
Very different, indeed, was the response of labour, more organised in Europe then with the higher trade-union density of the 70s: ‘We haven’t seen the ability of labour to get compensation for price increases. So we have massive real-wage losses in Germany and the same in many other European countries. And that really is the big difference in dynamics.’
Liina Carr agreed that this was a supply-side phenomenon but pointed out that inflation had started to rise before the invasion of Ukraine. Companies were trying to recuperate losses stemming from the pandemic lockdowns through price markups.
The European Central Bank and the European Commission were telling trade unions that they had to be ‘moderate’ in their pay claims, to avoid a ‘wage-price spiral’, she said. Yet the root causes of inflation lay elsewhere: it was not really wage-driven. ‘We cannot use the traditional remedies to try to fix the problem, but we have to really look at different ways of addressing it.’ Nominal wage increases were being negotiated but lagging behind prices racing ahead.
As for the ECB’s insistence on increasing the interest rate, Carr said: ‘It is not helping to really curtail the inflation. And precisely because it doesn’t come from that traditional source that would cool off inflation by increasing the interest rate—quite the contrary.’
Those hurt most by rising interest rates were the most vulnerable, the least the big multinationals. ‘They are the price-setters, so they can recuperate by setting a higher price. We can see that a lot of SMEs are struggling to survive but, on the other hand, we have big corporations that are making enormous profits.’
Georgia Kaplanoglou has researched the disproportionate impact of the crisis on the most vulnerable in Greece. On the wider European canvas, she highlighted a study published in February 2021, demonstrating that interest-rate rises would hit the poorest households hardest. ‘So this is a direct impact of interest-rate hikes on household finances.’
Domestically, she has shown, using household-budget survey data, that households in the lowest income decile have faced a 16 per cent increase in their cost of living due to the crisis, compared with just 6 per cent for those in the the top decile. And while energy prices have stabilised, food prices have been increasing more and more.
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The short term
So what needs to be done immediately? Here, discussion started with the six-point plan of the ETUC:
- pay rises to meet the increase in the cost of living and ensure workers receive a fair share of productivity gains, as well as measures to promote collective bargaining;
- payments targeted at people struggling to afford their energy bills, put food on the table and pay the rent, with a ban on disconnections;
- price caps especially on energy bills and a watertight tax on excessive profits, along with other measures to stop profiteering, such as curbing dividends, and to prevent speculation on food prices;
- national and European measures to protect incomes and jobs, as with SURE, and to finance social measures to cope with the crisis and just-transition processes;
- reform of the EU energy market, recognising that energy is a public good and tackling the root causes of the crisis, such as under-investment in green energy and the consequences of privatisation, and
- a seat at the table for trade unions to design and implement anti-crisis measures through social dialogue.
Carr highlighted ‘the age-old fight for trade unions … for fair pay that can also help to sustain the economy’, stressing the need to raise ‘internal demand’. Targeted assistance was needed for households ‘struggling to afford their energy bills, to buy food and to pay their rent’.
On price caps and taxing on excessive profits, some member states which had experimented with the latter had not achieved the expected yield, she said, because ‘the big multinationals are so good at hiding their profit or distributing it all throughout their network’. By contrast, during the pandemic crisis the SURE instrument had been very quickly put in place to support short-time working and keep people in employment—’it worked really well and the feedback from everywhere in Europe has been positive’. Trade unions had to be engaged, because otherwise ‘the measures, if and when they are put in place, are going to be poorer in quality, less targeted and will not have such an intended positive effect’.
Kaplanoglou entered the rider that if ‘targeted’ meant ‘means-tested’ then take-up was weaker. A World Bank study of the minimum-income scheme introduced by Greece in 2017 found only 60 per cent take-up among the lowest decile.
By contrast, she praised the European Union minimum-wage directive: ‘Europe should be congratulated on this—it’s really very important.’ Yet the wage increases needed for those on the minimum wage to sustain their incomes during the cost-of-living crisis would be have been particularly high: her simulations found a 70 per cent increase would have been needed in Greece for a household headed by two individuals on the minimum wage.
Picking up on Carr’s case for raising ‘internal demand’, Sigl-Glöckner said the ECB’s interest-rate hikes would ‘just add to the pain’, in an international context of the US and China slowing down. ‘What we need for internal demand to go up is more people who have enough money in their bank accounts to spend it. In Germany, we have 30 per cent of people without any money or substantial savings in their bank accounts, so there you have a real constraint on demand—a pretty large low-wage sector … What we need to do is somehow to manage to pay these people better.’ But that would be money ‘coming out of the public purse and public purses are now really heavily strained’.
The long run
The discussion finally turned to the long-term challenge of realising the public investment to remedy the supply deficits—such as in (renewable) energy—which fuelled the current inflation in the context of the Russian (fossil-fuel) supply shock. For Kaplanoglou, this reflected a general problem of how the public sector was assessed: ‘What we are looking at for all these decades is public debt. What we should be looking at is the net wealth of the public sector.’ Investment in public healthcare would increase the budget deficit immediately but such public investment would ‘bear fruit in the future’.
Sigl-Glöckner highlighted how even the new fiscal rules proposed by the European Commission remained heavily focused on ‘the debt stock’, when what was needed was to ‘complete the balance sheet’ by looking at the assets as well as the liabilities. These included ‘human capital’, admittedly difficult to measure. ‘But that is important to count because, as advanced economies, what really drives future wealth is human capital.’
Investment in this regard is conventionally—and in Germany constitutionally—constrained by assessment of its ‘potential output’. But for Sigl-Glöckner ‘fiscal policy is political’ and whether a certain amount was invested in, say, early-childhood education should be a decision made by the national parliament.
Carr concurred: ‘Why is educating—preparing people for the labour market to be productive—or keeping us all healthy and safe, why is it a cost? Why is it an expenditure? And why isn’t it an investment?’ She said that the Macroeconomic Imbalances Procedure for supervision of EU member states should be complemented by a ‘social imbalances procedure’. Then the former would have to address how to alleviate the latter and not just look at ‘debt and the deficit’.
Is then what is needed a successor to the Recovery and Resilience Facility established because of the pandemic, so that the large-scale public investment under discussion can be mobilised—particularly for the green transition and reduction of energy costs—and deployed in a socially responsible manner?
Sigl-Glöckner said that calculations by Dezernat Zukunft had shown that, without such a ‘European fiscal construct’, dealing with rising interest rates, the costs of ageing and raising defence expenditures to 2 per cent of gross domestic product would make it impossible to bring national debts down as the commission intended while at the same time making the necessary investments to meet climate commitments. ‘Without anything at the European level, it’s simply impossible—unless someone invents a magic wand—to reconcile the goals of limiting the balance sheet and doing what’s required. If the goal is to limit balance sheets to bring down debt stocks, then yes, we definitely need to have something at the European level, and that might be more stable in a currency union.’
Carr agreed on the need for a common financial instrument to facilitate member-states’ investments. ‘Especially when we are talking about these green investments—whether it’s in infrastructure, energy production—a lot of it is cross-border.’ Big Europe-wide projects were needed. ‘So, for us, there is, no question, 110 per cent, we need a permanent European-level instrument and especially when we have the common currency.’
The ‘frugal’ EU member states—Austria, Denmark, the Netherlands and Sweden—had only agreed to the RRF in 2020 on the basis that it was temporary, Carr noted. But Kaplanoglou detected a shift in perspective across Europe: ‘The Covid crisis proved how necessary governments are. So this obsession with austerity is not so large anymore.’
Could capital be taxed more heavily to help fund public investment—given that a big difference since the 1970s is that globalisation has rendered major business assets inaccessible to individual national exchequers? Carr said the ETUC had supported the process led by the Organisation for Economic Co-operation and Development to establish a minimum global rate for corporate taxation, on which at EU level Hungary had held up progress.
Congress had wanted a 25 per cent minimum, rather than the 15 per cent on which the process had settled. But it was also important that it was an effective tax rate, not a nominal one, and that the EU took seriously tax evasion and avoidance, ‘because there is so much money actually in Europe that is hidden away or sent around the world through really aggressive tax planning’.
She added: ‘We need to really look at wealth taxation, especially the top 10 per cent, because they have made enormous gains through the Covid crisis. The figures are frightening.’ Sigl-Glöckner highlighted how much wealth was being accumulated (via rents) which did not enter the real economy any more. That needed to be taxed to bring it back into circulation and into wages, to have more money circulating in the internal economy. ‘So it’s really becoming a debate about revenue generation.’
She concluded the discussion by relativising the still-prevailing totem of gross domestic product. ‘We could start with taking account of emissions in GDP—subtracting that because it is a cost—and then, secondly, making explicit the value of actually having a healthy, well-educated population. So adjust the goal that politicians are working towards and what they can present at the end of the year. And then I think we really need to work towards a much more balanced economy—one that has less wealth accumulation, which always requires more debt to keep it going because you have a lot of money that doesn’t enter the real economy: it sits in bank accounts, goes into financial markets.
‘We need to rebalance, which means we need to become better at extracting money that accumulates or rejig power balances, so you have stronger bargaining power and more money goes into wages instead of dividends, essentially. And then we need to start to be able to pay jobs according to what they benefit society—that’s really what we’ve got completely wrong. And this is where you have the real intersection between fiscal policy and the labour market and where it becomes really interesting.’
Robin Wilson is editor-in-chief of Social Europe, an adviser to the Council of Europe on intercultural integration and author of The Northern Ireland Experience of Conflict and Agreement: A Model for Export? (Manchester University Press) and Meeting the Challenge of Cultural Diversity in Europe: Moving Beyond the Crisis (Edward Elgar).