Wage growth in Germany after years of restraint would boost euro zone inflation unless other countries show moderation with their salary deals, the European Commission said today.
The European Central Bank wants pay rises to be closely linked to productivity gains, but there is rising pressure from trade unions and politicians to give workers more of the spoils of faster economic growth.
A European Commission report suggested Portugal, Luxembourg, Ireland, Spain, Italy and the Netherlands may have to show more wage restraint. The commission said it was mainly thanks to Germany that wage growth in recent years in the 13 countries using the single currency was in line with the ECB's price stability target.
"Evidence shows that brightening economic conditions have not translated into accelerating wage growth so far," the commission said in a quarterly report on the euro zone economy. German unit labour costs stagnated between 2002 and 2006 despite big pay rises in several other countries, it said.
"Should wages in Germany return to more standard patterns, then unchanged wage and price-setting behaviour in other countries would clearly entail pressures for the euro area as a whole, jeopardising price stability," the commission said.
The ECB, which wants to keep inflation just below 2 per cent, has repeatedly pointed to inflationary risks from ongoing wage negotiations, notably in Germany, as unemployment falls. Markets expect it will raise rates from 3.75 to 4.0 per cent in June.