ECB’s Holzmann: Danger of Wage-Price Spiral

24 January 2022

By David Barwick – FRANKFURT (Econostream) – There is a danger of a wage-price spiral in Europe, European Central Bank Governing Council member Robert Holzmann said Saturday.

In an interview with Austrian daily Die Presse, Holzmann, who heads the Austrian National Bank, said that Europe was understandably behind the US in tightening monetary policy, and that the ECB’s leisurely approach to withdrawing accommodation was ‘intended to prevent a disruptive development’ in view of financial markets’ ‘sensitive’ nature.

‘The term "temporary" is certainly relative’, he said. ‘We all assume that inflation will decline. The question is, over what period of time?’

It is still not impossible that inflation would subside early this year and then more sharply at the end of the year, he said. ‘However, we also do not know whether inflation will not remain at a high level for longer’, he said. ‘The so-called second-round effects are decisive here - for example, wage increases. So, is inflation a mountain or will it become an elevated plateau? There is a lot of uncertainty about that at the moment, because our models can't depict it well either.’

Wage negotiations were being eyed closely, he said, and so far showed no signs of second-round effects. ‘But we do not know what the individual wage settlements will look like’, he observed. ‘What must also be remembered is that wage increases will not be uniform. In sectors that have been abandoned by many employees, there will certainly be wage increases. So basically, there is a danger of a wage-price spiral. But I believe that the workers' and employers' representatives are acting very rationally and thoughtfully here.

In any event, that safe investments would yield a real return was very unlikely for now, he said. ‘Collecting money at the savings account and then expecting something to be left over in real terms will unfortunately not work’, he continued. ‘A return to conventional monetary policy with positive interest rates is also impossible at present. For that to happen, the equilibrium interest rate must first rise.’