EUROPE
Death of a myth: Wage hike does not lead to inflation
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When Germany’s largest labour union, IG Metall, agreed to a 5.2 per cent wage rise last November, monetary policymakers breathed a great sigh of relief. As reported in Financial Times, this deal finally eased central banks’ inconvenient wage-price spiral fears.
The fear that wage increases will lead to price increases (and hence inflation) is quite widespread. We see that not only the Germans but also the British live with the same concern. Bank of England President Andrew Bailey says the wage bargain needs to be “restrained” or things will get out of hand. Jason Furman, who was the Director of the National Economic Council under Barack Obama, is also clear: Increasing wages also increases prices. According to Furman, this is “basic micro and common sense.”
European Central Bank President Christine Lagarde said they would look at the increase in wages to see if they would continue to raise interest rates in Europe. Last May, Lagarde rejected bank employees’ desire to link wage increases to consumer price increases and wrote that this was “not acceptable and desirable”.
Klaas Knot, president of the Bank of the Netherlands, who has been skeptical about wage increases at the level of inflation, said they should be on high alert for any “feedback loop” to wage and price increases, but added that current wage developments do not provide clear evidence that they are entering a wage-price spiral in the eurozone.
Federal Reserve Chair Jerome Powell has made the most explicit statement. In explaining why they’re raising interest rates; Powell makes it clear that they want to reduce demand and lower wages. Powell thinks they can do all this without slowing the economy and putting it in recession. However, clearly, interest rate hike aims to reduce the bargaining power of the working class and suppress wages by increasing unemployment.
What is the wage-price spiral?
The technical wage-price spiral recipe: at least three out of four consecutive quarters have a wage-price spiral if both consumer prices and nominal wages increase. To give a more concise definition, price increase triggers the wage increase, and wage increase causes the capital owner to increase the prices, and so on.
The debt between Thomas Weston, a leader of the carpenter’s union, and Karl Marx at the International Working Men’s Association in 1865 is the historical example of this issue. Just like the central banks argue today, Weston said that capitalists reflected the increase in wages to increase in prices to protect their profits; increasing prices would reduce the purchasing power of workers and thus keep real wages in place. That is, Watson concluded that a struggle or bargain for wage increases was useless.
Marx’s answer to this is summarized in the manuscript we know as Value, Price, Profit. Marx presents three arguments against Weston: First, wage increases come to the fore not out of the blue, but usually as a reaction to rising prices. Second, wages don’t cause inflation, but multiple factors influence it: The size of production, the productive forces of labor, the value of money, fluctuations in market prices, and the different phases of industrial cycles. So, for example, under the condition that wages remain the same, a change in the amount of money in the market (or the value of money) can trigger inflation. Or, again, a change in labor efficiency (i.e., productivity) has a direct impact on commodity prices, provided wages remain the same.
Moreover, according to Marx, it is true that a general rise in wage levels reduces overall profit rates, but this does not directly affect the prices of commodities. Capitalists and their ideologists object to the increase in wages, not because prices will increase, but because profits will decrease. The physical limit here is to provide the means of livelihood required for the employee working today to work tomorrow. However, Marx says that in some examples, the wage received by the workers can be pushed below the minimum subsistence. Such a reduce in labor costs is compensated by charity on national scope or laws on supporting the poor. Hence, the question of how to detect wages and profits is answered dynamically, not statically, and the answer is determined by the opposing classes’ struggles and balances of power.
It will happen again: The claim that workers’ “excessive” demands for wages will lead to inflation is an assumption raised by the capitalist and his ideologists, who know that their profits will decrease. Now, it is time talk about the cracks on this front.
IMF’s confession
IMF economists are finding it very difficult to find the evidence they have been looking for from history for a wage-price spiral. A recently published article examines wage-price spirals in the last 60 years of advanced economies.
The conclusion reached by IMF economists is that wage-price spirals are difficult to find in recent historical records, at least when they are defined as a continuous increase in prices and wages. Moreover, the IMF has even more difficulty in finding the wage-price spiral in other historical periods when real wages has fallen like today. What happens is the nominal wage increases that only partially replace the real wage loss.
The examples found by the economists showing fall in real wages and tight labour market as experienced today, often prioritize a period of falling inflation and rising nominal wages. Thus, as economists describe it as a “surprise,” sustained wage and price increases in only a small part of the example are being rolled over to the next period. As a result, the IMF finds that the rise in nominal wages cannot necessarily be taken as a sign that a wage-price spiral period has begun.
The International Labour Organisation (ILO) also confirms this situation. In the first half of 2022, global monthly wages declined by 0.9 per cent in real terms. When wages in developed countries are separated from wages in developing countries, the ILO report shows that real wages in developed G20 countries decreased by 2.2 per cent, while in developing countries they increased by only 0.8 per cent. Looking at the United States and Canada, it is understood that real wages decreased by 3.2 per cent in the first half of this year.
The OECD report complements this statement. The report, which includes third-quarter data, suggests real wages decline in 31 of 32 major countries in the third quarter of 2022 compared to the same period the previous year.
President and CEO of the Federal Reserve Bank of San Francisco, Mary C. Daly also has had to admit that one of the most fundamental elements of the wage-price spiral is that the rising wage phenomenon has not emerged with inflation.
The ILO says that inflation is not caused by wage increases, but by the Ukrainian war and the global energy crisis.
Sources of inflation
Paul Donovan, the chief economist of UBS, one of the world’s largest asset managers, reminds that real wages are falling globally, pointing out that the Fed’s wage-price spiral thesis is not correct.
According to Donovan, the main source of today’s inflation is the excessive increase in profits. If inflation comes from profit rather than labor, says Donovan, central banks should look for other ways alternative to shrinking demand based on increasing unemployment.
A graphic published by the Economy Policy Institute last April provides the picture. Unit labour cost constituted 61.8 per cent of the increase in unit prices in non-financial companies between 1979-2019. Between the fourth quarter of 2021 and the second quarter of 2022, this rate decreased to 7.9 per cent. The main factor driving the increase in unit prices is profit with 53.9 percent. It is composed of non-work input prices with 38.3 percent.
So, what else is among the sources of inflation? The decrease in supply chains and labor productivity during the COVID period and the inadequate supply afterwards is a reason. Zero COVID policies in China and the subsequent Russia-Ukraine war also has caused disruptions in global supply chains and cost increases. Sanctions against Russia have also led to an exorbitant rise in global energy prices.
Moreover, in Britain, for example, service providers that distribute to retail energy companies and are often owned by large hedge funds and private equity companies can make profits of up to 40 per cent. These companies, known as the “Big Six,” have almost completely monopolized energy supplies. 99 per cent of domestic and small business customers depend on the Big Six. When the huge profits of international energy monopolies such as BP, Shell, Exxon, Chevron, Total is added, the picture is completed. The UK energy distribution companies, which have been privatized since the 1980s, work for profit and households suffer for it. The figure says it all: The Big Six distributed a £23 billion dividend to shareholders. That’s almost six times the tax the Six have been paying over the last decade.
On the other hand, excessive profit rates in 2021 are expected to decrease with the rise in interest rates. It is certain that there will be a slowdown in the profits and therefore investments driven by the increases in energy and raw material prices last year. The downward trend in large tech companies that made huge profits during the pandemic period, layoffs, and the difficulty in accessing finance also indicate that recession is likely in advanced economies next year.
Moreover, since the source of inflation is not “excessive demand” but weak supply, central banks have nothing to do with it. In addition to the disruption of supply chains, the Ukrainian war, and anti-Russian sanctions, decrease in profitability, declining labour productivity and investment appetite do not seem to match supply with demand. While recruitment in the United States is still in full swing, the lack of pace in GDP growth suggests that the problem of labour productivity in developed countries remains. The emergence of a sustained and downward demand shock in the world system therefore seems preordained.
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EUROPE
Chancellor Nehammer resigns, sparking political uncertainty in Austria
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12 hours agoon
06/01/2025Political uncertainty has begun in Austria after the surprise resignation of Chancellor Karl Nehammer at the weekend. This step is thought to lead to the right-wing Austrian Freedom Party (FPÖ) taking control of the government for the first time.
Nehammer, a former military officer who became chancellor in 2021 after a political scandal forced Sebastian Kurz to resign, announced he would step down as leader of both the country and the centre-right Austrian People’s Party (ÖVP).
In a short video statement late on Saturday, he said his resignation as chancellor would take effect in the coming days and promised an “orderly transition.”
This decision, which comes after talks to form a tripartite centrist coalition collapsed on Friday, opens the door for the ÖVP to resume coalition talks with the FPÖ. Nehammer had opposed a coalition with the FPÖ, citing the “extremism” of its leader, Herbert Kickl.
However, this view was not shared by everyone in the ÖVP. The party’s business wing, in particular, wants the next government to introduce more aggressive reforms to stimulate the economy, which is in its second year of recession.
ÖVP officials signaled on Sunday that the party was ready for talks with the FPÖ, which won Austria’s general election in September with 29% of the vote.
After the other four parties represented in parliament refused to negotiate with the FPÖ, the FPÖ’s victory was seen as a Pyrrhic victory until Sunday.
“We are not responsible for the lost time, the chaos, and the enormous loss of trust that has been created here,” Kickl said late on Sunday. “On the contrary, it is clear that the FPÖ has been and continues to be the only stable factor in Austria’s domestic politics,” he added.
A coalition between the FPÖ and the ÖVP, which finished second in the September elections with 26% of the vote, would have a large majority in parliament.
The only question now is whether Austrian President Alexander Van der Bellen, who has the power to reject chancellor candidates, will accept Kickl as chancellor.
Theoretically, the FPÖ could field a less controversial candidate, but Kickl has made it clear that he wants the job.
If the FPÖ and the ÖVP agree to form a government and appoint Kickl as chancellor, Van der Bellen can use his veto, but this would plunge the country into a constitutional crisis.
Such an outcome would probably only increase the popularity of the FPÖ. In the latest opinion polls, the party is polling at 37%, which means that if Van der Bellen calls for a new election, the FPÖ would be even stronger.
In November, the party won an important regional election in Styria with 35% of the vote and took control of the province for the first time.
Van der Bellen is therefore more likely to take this in stride. He acknowledged this in a statement on Sunday and said he had planned a meeting with Kickl for Monday “to discuss the new situation.”
Kickl, who campaigned on the promise of becoming Volkskanzler (People’s Chancellor) and turning Austria into a “fortress” against immigration, is known for his harsh comments about foreigners and Islam.
As interior minister in 2018, for example, the FPÖ leader proposed the idea of “rounding up” refugees in special centers and ordered the refugee registration centers to be renamed “removal centers.”
Van der Bellen, former leader of the Austrian Green Party, has made no secret of his displeasure with Kickl and his party, which has sharply criticized the EU and even flirted with taking Austria out of the bloc.
After the elections in September, the President of the Republic broke with tradition and chose not to give Kickl, the leader of the strongest party, the task of forming a coalition.
The rise of the FPÖ, founded in the 1950s by a group of former Nazis who seem to have not given up on their ideas, will be the culmination of decades of evolution.
The party first came to international attention in the 1990s under Jörg Haider, who used the issue of immigration from the former Yugoslavia to mobilize voters and challenge the mainstream. By 1999, Haider had built up a strong following that propelled his party to second place in the national elections.
The FPÖ continued to enter coalitions as a junior partner of the ÖVP. The centre-right’s decision to link arms with the FPÖ was so controversial at the time that it led other members of the EU to impose “diplomatic sanctions” on Vienna. This was a symbolic gesture, which in practice meant a halt to bilateral visits.
An FPÖ-led government would be a turning point for Austria, a country whose national politics has been dominated by “centre” parties since the Second World War.
The second FPÖ-ÖVP coalition, formed in 2017 under the leadership of Sebastian Kurz, collapsed dramatically after the “Ibiza affair.”
The government collapsed 18 months after the publication of a secretly filmed video showing then FPÖ leader and Vice Chancellor Heinz-Christian Strache trying to do political favors for money to a woman he believed to be the niece of a Russian oligarch.
The footage, several hours long, was shot at a private villa on the island of Ibiza, where Strache was holidaying in the months before taking office.
The investigations that have been ongoing since then have preoccupied the Austrian justice system and played a central role in Kurz’s departure from office.
It remains to be seen whether former Chancellor Kurz will return to Austrian politics after his dramatic fall from grace.
Last February, an Austrian court found Kurz guilty of making false statements to a parliamentary commission of inquiry.
Judge Michael Radasztics gave the 37-year-old Kurz an eight-month suspended prison sentence for the serious offense of deceiving parliament under oath during the 2020 investigation into his government.
Since his resignation as chancellor, Kurz has been a consultant for Silicon Valley investor and Palantir founder Peter Thiel.
Kurz also founded a cybersecurity firm in Israel together with Shalev Hulio, co-founder of the company behind the Pegasus spyware.
On the other hand, according to Paul Ronzheimer, deputy editor-in-chief of Bild and Kurz’s biographer, Kurz does not want to return to the party, despite rumors that the ÖVP has made him an offer.
Ahmetcan Uzlaşık, Brussels
Poland assumed the presidency of the Council of the European Union for the second time officially on January 3, 2025, with a very political agenda. Over the course of its six-month term, Warsaw plans to host more than 300 official meetings across 24 cities, concluding on June 30. With an ambitious program centered on security, the presidency seeks to address escalating geopolitical challenges while shaping the EU’s policy direction.
The Polish presidency has prioritized strengthening European security in multiple dimensions, including external, internal, informational, economic, energy, food, and health sectors. This leadership tenure is expected to see significant efforts to bolster the EU’s resilience against current global tensions. Assistant Professor at the University of Wroclaw and Senior Analyst in the institute of Central Europe Jakub Bornio talked to Harici about Poland’s EU Presidency and what it means for regional and global politics.
A Relief After Hungary’s Controversial Term
Poland’s Council Presidency arrives at a pivotal moment for the EU, following Hungary’s controversial tenure, characterized by the Eurosceptic approach of Prime Minister Viktor Orbán and his controversial visits. EU leaders are now expressing relief as they transition to working with Poland under Donald Tusk, a committed pro-NATO and pro-EU leader.
The Polish Presidency’s program outlines its priorities, stating: “In view of Russia’s aggression in Ukraine and other security threats, the work of the Foreign Affairs Council in the first half of 2025 will focus on maximizing support for Ukraine at political, military, and economic levels, maintaining current policies towards Russia and Belarus, and strengthening the security and resilience of the EU and its partners.”
It further emphasizes a commitment to transatlantic cooperation: “The Presidency will support the deepening of transatlantic relations. In particular, we are committed to EU-US coordination in the face of Russia’s aggression towards Ukraine and dialogue on global issues, including the Eastern Neighbourhood, China and the Indo-Pacific region, energy policy, new technologies, and the Connectivity Agenda.”
With these priorities, Poland’s leadership aims to reaffirm the EU’s unified stance on critical geopolitical challenges. However, questions remain about how Poland’s positions on Ukraine and NATO will be affected after the inauguration of elected President Donald Trump.
Poland Excludes Hungary’s Ambassador Amid Diplomatic Tensions
Poland barred Hungary’s ambassador from the opening gala of its EU presidency, citing a diplomatic dispute over former Polish deputy justice minister Marcin Romanowski, who fled corruption charges in Poland and was granted political asylum by Hungary in December. Hungarian Foreign Minister Péter Szijjártó called the move “pathetic and childish,” escalating tensions between the nations.
Poland’s Foreign Minister Radosław Sikorski deemed Hungary’s decision to grant asylum a “hostile act” and informed Hungarian Ambassador István Íjgyártó he was not welcome at the January 3 gala, hosted by Polish Prime Minister Donald Tusk and European Council President Antonio Costa.
“Europe Must Move Beyond Survival to a Political Offensive,” Said Tusk
Incumbent Prime Minister of Poland and former President of the European Council, Donald Tusk, emphasized on December 4, 2024, that the European Union must shift from a state of “survival” to a “political offensive.” Reflecting on the 13 years since Poland’s last presidency, Tusk underscored the importance of the current timing and addressed several non-routine priorities, including military, economic, energy, and health security, as well as the need to combat disinformation.
“Breakthroughs are perhaps awaiting us regarding war and peace east of our border,” Tusk said, calling for a “profound correction” of European priorities.
“Poland’s Presidency Prioritizes Security and Sanctions”
Poland’s EU Council Presidency will emphasize security and defense, continuing its longstanding approach since Russia’s annexation of Crimea in 2014. “Poland’s priority will be to maintain and, to some extent, extend sanctions on Russia,” explains Jakub Bornio, Assistant Professor at the University of Wrocław and Senior Analyst at the Institute of Central Europe. Borneo said Poland will also focus on securing financial assistance for EU member states providing military support to Ukraine, leveraging the European Peace Facility.
However, Hungary’s veto on critical financial measures remains a challenge. “Without strong signals from the US, I’m not sure whether it will be quite easy for Poland to convince Hungary to ease its stance,” Bornio warns. Another key focus will be advocating for the exclusion of defense spending from EU budget deficit calculations, a necessity given Poland’s planned allocation of 4.7% of its GDP to defense by 2025.
Bornio also highlights broader security concerns: “Poland’s priorities include fighting illegal migration and the weaponization of migration, as well as addressing hybrid threats orchestrated by Belarus and Russia.” Additionally, Poland will push for NATO member states to allocate at least 3% of their GDP to military spending, requiring EU cooperation on financial rules.
“Both Poland and the U.S. depend on each other”
“I don’t see major changes coming, at least when it comes to security in the region. Both Poland and the U.S. depend on each other,” says Jakub Bornio, considering the re-election of Trump. While acknowledging Poland’s status as a junior partner in this alliance, he highlights that the country still possesses assets and capabilities that the U.S. values. As a result, U.S.-Polish relations are expected to remain strong in security matters.
However, Bornio foresees potential strains in personal relationships. “It is quite likely that these personal relations will be kind of harsh, and it may impact Poland’s ability to affect its relations with the U.S. It is not a secret that there are some animosities between the Polish prime minister’s camp and Trump’s camp,” he notes. This tension could also spill over into Poland’s ability to navigate U.S.-Germany relations, which Bornio predicts will be turbulent under Trump’s second administration.
Despite these challenges, Bornio emphasizes Poland’s commitment to maintaining strong ties with the U.S. “What we learned from our previous administration of Trump is that he is also going to favor bilateral ties rather than multilateral platforms,” he concludes.
“Polish Elections Will Not Change Security or EU Commitment”
“It will not change much when it comes to foreign and security policy,” Jakub Bornio says when discussing the upcoming Polish elections in 2025. Both the Civic Coalition and the Law and Justice Party have strong commitments to security, defense, and Poland’s continued EU membership.
“Both candidates believe that Poland should be a member of the EU and that security should be prioritized,” he adds, noting a consensus on these key issues.
However, Bornio points to potential challenges: “There are big hopes in the Law and Justice camp, currently in opposition, that their candidate will be supported somehow by Trump and his cabinet.” He also highlights the tension between the current Polish elites and Trump’s administration.
“Poland Won’t Prioritize Türkiye During This Term”
Türkiye is mentioned in two sections of the Polish Presidency’s program. Under the Foreign Affairs Council, the document highlights efforts to “keep the Western Balkans and Turkey in the orbit of close cooperation with the EU under the Common Foreign and Security Policy (CFSP), including by maintaining an ongoing political dialogue.” Additionally, under the General Affairs Council’s enlargement paragraph, the Polish Presidency commits to maintaining a “constructive dialogue with Turkey, taking into account its status as a candidate country and in line with European Council conclusions.”
Jakub Bornio discussed Poland’s approach to EU enlargement, noting that while Poland has long advocated for EU expansion, “I don’t see EU-Türkiye relations changing much in this half year.” Poland will focus on strengthening its ties with the Western Balkans, Moldova, and Ukraine. “Especially when it comes to Western Balkan states, association with the EU is quite possible and will be emphasized by the Polish presidency,” Bornio adds, while emphasizing that no significant changes are expected in the short term. He also predicts that the EU will play a crucial role in supporting Moldova and aims for a more balanced approach to Georgia.
Bornio also highlighted Poland’s cautious stance on Türkiye. He explained that Poland has supported Türkiye’s NATO presence in the Eastern Flank, where there is only a small unit deployed so far. However, he mentioned that hopes for stronger cooperation in security matters exemplified by the Bayraktar deals have not materialized and the weaponization of migration, a concern linked to Türkiye’s actions, has led to a cooler reception in Warsaw. “This was not very welcomed by Warsaw, so I don’t think Poland – regardless of its declarations, will prioritize Türkiye during this term.”
Trio Presidency System since Lisbon Treaty
The presidency of the Council of the EU rotates every six months among the member states. Each country that holds the presidency chairs meetings, helping to manage the legislative process. The presidency system also operates in “trios,” where three consecutive member states collaborate closely over an 18-month period to set long-term goals and prepare a common agenda. Although the Council Presidency does not possess any executive power, it is still important in the context of leadership and agenda-setting.
This system, introduced by the Lisbon Treaty in 2009, allows each country to focus on specific priorities within the broader context. The current trio includes Poland, Denmark, and Cyprus. Each presidency is tasked with driving forward EU legislation, ensuring smooth operations in the Council, and representing the Council in its relations with other EU institutions, including the European Commission and Parliament.
EUROPE
Slovakia considers retaliatory measures after Ukraine halts Russian gas transit
Published
4 days agoon
03/01/2025Slovak Prime Minister Robert Fico announced on Thursday, 2 December, that the coalition government would discuss retaliatory measures against Ukraine for halting the flow of Russian gas through its territory to Slovakia.
In a video message posted on Facebook, Fico stated that the Smer party would consider cutting off electricity supplies to Ukraine, reducing aid to Ukrainian refugees, and demanding the restoration of gas transits or compensation for losses Slovakia claims to have suffered due to the cessation of Russian gas flows.
Russian gas exports via Soviet-era pipelines through Ukraine ceased on New Year’s Day when the transit contract between Russia and Ukraine expired, marking the end of Moscow’s decades-long dominance of European energy markets.
Slovakia has alternative sources of gas, but Fico emphasized that the country would lose its transit revenues and incur additional transit fees to import non-Russian gas. He also warned that gas and electricity prices in Europe would rise as a result of Ukraine’s actions.
Fico announced that a Slovak delegation would discuss the situation in Brussels next Tuesday, after which his ruling coalition would consider retaliating against Ukrainian President Volodymyr Zelensky’s actions, which he labeled as ‘sabotage’.
‘I declare that (my Smer-SSD party) is ready to discuss and agree in the coalition on the issues of stopping the supply of electricity and significantly reducing support for Ukrainian citizens in Slovakia,’ Fico stated.
The Slovak leader argued that the only alternative for a ‘sovereign Slovakia’ was to demand the restoration of transit or mechanisms to compensate for the loss of around 500 million euros in public finances.
Last week, Zelensky accused Fico of opening ‘a second energy front against Ukraine at Russia’s behest’.
Slovakia’s majority state-owned gas transit network operator, Eustream, reported revenues of €158 million and an after-tax profit of €25 million in the six months to 31 January, the latest period reported on its website.
State-owned Slovak gas importer SPP, which supplies about two-thirds of Slovak demand, stated on Wednesday that replacing all Russian gas this year would result in additional costs of about 90 million euros, mainly due to transit fees.
Slovakia, which borders Ukraine to the east, exported 2.4 million megawatt hours of electricity in the first 11 months of 2024 to Ukraine, which has been suffering from electricity shortages due to Russian bombardment, according to data from the Slovak grid operator.
Fico, who visited Russian President Vladimir Putin in Moscow on 22 December, said last week that Slovakia would consider reciprocal measures against Ukraine, such as halting back-up electricity supplies, if Kyiv stops gas transit from 1 January.
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