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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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German carmakers face historical crisis as Chinese competition and market contraction erode profits

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03/08/2026

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The German automotive industry is enduring a severe period of distress, driven by intensifying competition from Chinese vehicle manufacturers and an increasingly overheated domestic market in China.

For decades, China served as the primary engine that propelled German carmakers into global titans, yielding robust sales and billions in profits. Today, that historic reliance has transformed into their heaviest liability.

According to an analysis published by Politico, domestic Chinese manufacturers—having spent decades observing, learning, and investing—are now producing better-equipped electric vehicles at prices lower than those offered by Volkswagen, BMW, and Mercedes-Benz.

At the same time, China’s automotive market—the largest in the world—has become severely overheated and contracted by a fifth this year. The sharp downturn has forced both domestic and foreign automakers into a ruthless battle for survival.

The tangible impact of this pressure became clear this month as German carmakers reported their half-year financial results, disclosing billions of dollars in losses alongside announcements of widespread layoffs and plant closures across Europe.

“The environment has never been as challenging as the one we face today,” Oliver Blume, Chief Executive Officer of the Volkswagen Group, told investors. “Looking ahead, the risks before us are steadily mounting.”

The structural distress within the auto sector delivers another blow to Germany’s already struggling economy. It also presents a escalating political predicament for Chancellor Friedrich Merz’s fragile coalition ahead of critical state elections this autumn.

Dismantled dreams in the automotive sector

Since the 1980s, China had functioned as the primary engine of high profit margins for German automakers.

To gain access to a vast and rapidly expanding consumer market, carmakers were required by Beijing to establish joint ventures with local partners.

For decades, that arrangement proved highly lucrative, delivering massive returns to shareholders.

However, in the post-pandemic era, Chinese companies rapidly outpaced their German rivals in electric vehicle technology, which gained swift adoption across China.

While German brands long enjoyed high prestige among Chinese consumers, buyers have swiftly shifted toward domestic manufacturers offering superior technology at lower price points.

“They are suffering massive losses in China and may no longer be able to recover there,” said Pedro Pacheco, an automotive analyst at the consulting firm Gartner.

Chronic problems spread beyond China into Germany

The fallout is increasingly being felt inside manufacturing plants within Germany itself, rather than remaining confined to China.

BMW announced this week that it will eliminate 8,000 jobs across Germany by the end of 2027, with severance payments set to begin in October.

Mercedes-Benz is asking its workforce to extend weekly working hours from 35 to 40 hours for the same pay.

Meanwhile, industry flagship Volkswagen is locked in negotiations with labor unions over plans to lay off 100,000 workers and shut down domestic factories.

This severe downturn is providing political momentum to the Alternative for Germany (AfD) party, which is gaining traction in national polls.

The party is leveraging the auto sector’s decline and job losses to launch sharp attacks on the government.

“Even major industrial pillars like Volkswagen, Porsche, or Infineon are recording historic drops in profits and planning hundreds of thousands of layoffs in the coming years,” AfD co-leader Alice Weidel said this week. “This demonstrates how far the deindustrialization of our business hub has truly advanced.”

Merz and his governing coalition will get an initial indication of how these cutbacks resonate with voters during state elections this autumn in Saxony-Anhalt and Mecklenburg-Western Pomerania, both of which are strongholds for the AfD in eastern Germany.

Chinese vehicles begin to dominate European market

While automakers continue to perform well in North America and Europe, the collapse of sales in China is eroding overall profits.

Facing fierce domestic competition and systemic overcapacity at home, Chinese carmakers are exporting vehicles in record volumes.

Europe has emerged as their primary target market: China now sells more vehicles in Europe than Germany sells in China.

European consumers are enthusiastically embracing these imports. According to the latest data from the automotive industry association ACEA, sales of Chinese-made cars in the European Union surged by 63% in the first half of this year, rising from 338,000 units in 2025 to roughly 549,000 units in 2026.

That figure now represents nearly 10% of total European automobile sales.

Although German car companies carry an unparalleled exposure to China, even manufacturers with no operational footprint there, such as Renault, are feeling the severe impact of rising Chinese vehicle sales in Europe.

Automotive analyst Matthias Schmidt noted that the influx of inexpensive Chinese vehicles featuring advanced technology has put pressure on Renault and its budget brand, Dacia.

Renault disclosed on Thursday that sales of its Dacia brand fell by 8% year-on-year in the first half of 2026.

European firms forced into cooperation with Chinese rivals

The European Commission attempted to intervene by imposing tariffs on Chinese-made electric vehicles following an anti-subsidy investigation, but the added costs have done little to stem the inflow.

The tariffs do not apply to plug-in hybrid vehicles, leaving a lucrative loop-hole for Chinese manufacturers to exploit.

These shifting dynamics are driving several European automakers to forge direct partnerships with Chinese competitors.

Stellantis, the Franco-Italian-American conglomerate, established a joint venture with Chinese manufacturer Leapmotor. According to ACEA data, Leapmotor’s European sales surged from just 7,701 units in the first half of 2025 to 48,261 units during the same period this year.

Volkswagen CEO Blume hinted that his company could pursue a similar path, telling investors the carmaker might begin manufacturing certain models in Europe that were originally developed in China for European consumers.

Olaf Lies, Minister-President of Lower Saxony—a major shareholder in Volkswagen—said earlier this summer that it would be a strategic error for the automaker to isolate itself from China’s technological advancements.

“Our objective should not be to isolate technological developments from one another,” Lies stated.

However, Schmidt warned that such a strategy carries significant risks for the German brand’s equity.

He noted that these vehicles would effectively remain Chinese-engineered cars bearing a VW badge, a dynamic that could prompt consumers to buy the cheaper Chinese-branded versions directly.

Accelerating the search for new markets

European automakers are also attempting to offset losses by pursuing growth in emerging markets.

“North America, India, and the Global South represent our growth engines for tomorrow,” Blume told investors during a briefing.

Yet Chinese manufacturers have already established a commanding presence in those regions, dominating electric vehicle sales across Southeast Asia and Latin America.

Under heavy pressure, European automakers are also attempting to monetize their mass-production expertise by capturing a share of rising global defense spending.

Blume told investors that Volkswagen is engaged in “very advanced discussions” with a defense contractor, adding that he expects “a decision to be made within this year.”

However, portions of the workforce, particularly in Germany, remain hesitant about associating the company with the arms industry.

Furthermore, the move carries a serious risk of retaliation from Beijing. Earlier this month, China imposed export restrictions on 14 defense and technology firms, including German defense giant Rheinmetall.

While those measures were presented as retaliation against export curbs targeting Chinese entities, automotive companies entering the defense sector could find themselves exposed to similar actions.

“European carmakers must act very, very carefully because this is not just a quick gain,” Pacheco warned. “It may look like one, but once you step onto that chessboard, you need to know how to play chess.”

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Morawiecki launches Rozwój Plus movement following high-profile split from Poland’s PiS

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31/07/2026

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The first major event organized by the political circle of Mateusz Morawiecki, following his split from Law and Justice (PiS), is set to take place in Warsaw’s Praga district.

The gathering comes just days after the former prime minister and dozens of his allies severed ties with the national-conservative PiS.

The move also led to Morawiecki’s resignation from the presidency of the European Conservatives and Reformists (ECR) group in the European Parliament.

Organized by his Rozwój Plus (Development Plus) movement, the conference—dubbed “Morawiecki’s barbecue” due to the prominent inclusion of charcoal-grilled kiełbasa sausages—will mark a significant moment in Polish conservative politics.

The event will bring together key figures from the emerging movement alongside featured guests, including former world chess champion Garry Kasparov and General Rajmund Andrzejczak, the former chief of the General Staff of the Polish Armed Forces.

The gathering will offer Morawiecki’s camp an opportunity to present a political vision distinct from that of the current PiS leadership.

“Poles care about the fight for a strong Poland, their wallets, their jobs, housing, development, identity, culture, the Christian faith, and the defense of the cross hanging in the Sejm,” Morawiecki said this week. “These are our principles; this is our faith.”

Discussions will focus on demographics, security, and the politics of memory—topics that have grown increasingly sensitive amid recent tensions in Polish-Ukrainian relations.

While Morawiecki describes Rozwój Plus as an “expert group and think tank,” its political ambitions are becoming increasingly clear.

A new parliamentary group established on Wednesday brings together 40 deputies and one senator, providing his allies with an official platform in parliament and a base from which to challenge PiS.

“This is a threat to us,” Mateusz Kurzejewski, a PiS politician and spokesperson for Przemysław Czarnek’s prime ministerial campaign, told Euractiv. “After all, this is an initiative that reduces our chances of victory, though it does not eliminate them entirely. Therefore, we will continue to work hard.”

However, whether Morawiecki can successfully reshape the Polish right remains uncertain.

An SW Research poll commissioned by Onet revealed that 32.9% of respondents would consider voting for a party led by the former prime minister.

The strongest potential support comes from voters who already align with the right. Among respondents currently close to PiS, 14% said they would consider supporting Morawiecki, while 7.1% of those aligned with the further-right Confederation held the same view.

The initiative could also draw limited support from the ruling camp. Approximately 7.4% of voters currently supporting Prime Minister Donald Tusk’s pro-EU Civic Coalition, The Left, Poland 2050, or the Polish People’s Party indicated they would not rule out voting for a party led by Morawiecki.

Sources within Tusk’s government believe the split in PiS could benefit the ruling coalition in the short term.

“Particularly because this situation helps soften the impact of the hospital scandal,” one source told Euractiv. “Today, no one is talking about it anymore, and fortunately, no new statements have been made.”

The controversy revolves around allegations that a Warsaw hospital operated a preferential admission system for politicians belonging to the governing Civic Coalition, allowing them to enter a VIP lounge and receive medical treatment ahead of other patients.

Questions have also been raised regarding the salary of the doctor heading the hospital’s emergency department, who is reportedly linked to Tusk’s party.

Yet the same source warned that Morawiecki’s departure may have little long-term impact on the Civic Coalition.

They argued that PiS possesses a fiercely loyal electorate, whereas enthusiasm for Rozwój Plus could prove temporary.

“Look at the IBRiS poll for Rzeczpospolita,” another source said. “70% of PiS voters say they are voting for their ideal party. This core electorate accounts for about 70% of PiS’s current voters.”

A similar perspective prevails within PiS, where politicians contend that Morawiecki is chasing a voter base that may be too small to sustain a new party.

Speaking to Euractiv, Kurzejewski said:

“People do not want to vote for politicians who have been excluded from PiS. As for Law and Justice voters, they do not want to vote for those who betrayed them. That is why this project means Rozwój Plus will fail to clear the electoral threshold.”

Today’s event will therefore serve as an early test of whether Morawiecki can translate curiosity and institutional support into lasting political clout—or whether his departure will become merely another short-lived fracture on Poland’s crowded right wing.

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Ceuta migration crisis sparks diplomatic row as Italy demands Spain’s suspension from Schengen

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3 days ago

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31/07/2026

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An influx of thousands of migrants entering Spain from neighboring Morocco has plunged the autonomous enclave of Ceuta into chaos since Wednesday, prompting fresh backlash against Prime Minister Pedro Sánchez’s immigration policies.

Local authorities warned on Wednesday that an increasing number of migrants were reaching Ceuta by sea.

Juan Jesús Vivas, the president of Ceuta, told reporters that the situation constituted “an absolute humanitarian and social emergency” and demanded that the central government take action.

The situation escalated further on Thursday as thousands of people entered Ceuta by land and sea, overwhelming reception centers.

Videos shared online showed individuals using wetsuits and life jackets to swim to shore.

In a statement posted Thursday on X, Sánchez announced that he was working with Moroccan authorities to restore order as quickly as possible and promised an immediate response.

The border chaos erupted just weeks after the Spanish Supreme Court issued a ruling preventing the direct deportation of migrants arriving by sea.

Sánchez’s political rivals laid the blame for the crisis directly on the prime minister. Santiago Abascal, leader of the right-wing Vox party, characterized the events as an “invasion,” while Alberto Núñez Feijóo, leader of the center-right People’s Party (PP), was also among those condemning the prime minister.

The developments drew additional criticism from anti-immigration figures across Europe, including Alice Weidel, co-leader of Alternative for Germany (AfD), and Manfred Weber, chairman of the European People’s Party (EPP), the largest group in the European Parliament.

“This proves one thing: the Migration Pact and return regulations must be put into force today, not tomorrow. Furthermore, Frontex must be strengthened,” Weber wrote.

Tensions have remained high in Spain since the Sánchez administration launched a program enabling undocumented migrants to apply for legal status and remain in the country. More than one million people have applied under the scheme.

This represents the most severe border crisis to hit Ceuta since 2021, when at least 8,000 people entered the territory from Morocco.

The autonomous Spanish cities of Ceuta and Melilla are the only EU territories sharing a land border with Africa.

Italian leaders demand Spain’s expulsion from Schengen

Meanwhile, the fiercest reaction to the migration crisis in Spain emerged from Italy. Top Italian politicians demanded that Spain be expelled from the Schengen Area as tensions continued to escalate.

Italian Prime Minister Giorgia Meloni said in a statement on X: “The images coming from Ceuta are shocking and demonstrate once again that uncontrolled illegal migration poses a real threat to the security of Europe’s borders.”

Meloni added that Italy was prepared to act, “including through extraordinary measures,” to protect its borders and guarantee the safety of its citizens.

Together with Deputy Prime Minister Matteo Salvini and Foreign Minister Antonio Tajani—the most senior ministers representing parties in the Italian right-wing coalition—Meloni demanded the suspension of the Schengen Agreement or the exclusion of Spain from the border-free zone.

Under the accord, individuals can travel freely between 29 signatory European countries.

However, several member states have reinstated checks at certain borders, as permitted under the agreement, citing migration risks.

Italy had previously temporarily reintroduced controls on its border with Slovenia to prevent smuggling and terrorism.

Tajani went beyond calling for Spain’s exclusion from Schengen, attributing responsibility for the events in Ceuta to the immigration policies of Spanish Prime Minister Pedro Sánchez, who had promised to legalize hundreds of thousands of undocumented migrants.

The minister characterized the policy as “profoundly wrong” and claimed it provided “an incentive for human trafficking.”

The remarks provoked a sharp reaction from Spanish Foreign Minister José Manuel Albares, who summoned the Italian ambassador to account for Tajani’s statements.

Replying to Tajani on X, the Spanish minister wrote: “This message is unbefitting the foreign minister of a partner and friendly country from whom we expect European solidarity, not partisan demagogy.”

Separately, European Commissioner for Migration Magnus Brunner, who is also an EPP member, stated that the European Commission supports Spain in protecting the integrity of its borders, including Ceuta, and is in contact with Spanish Interior Minister Fernando Grande-Marlaska regarding the matter.

A spokesperson stated that the Commission welcomed “the close cooperation established between Morocco and Spain to combat these migratory flows and to ensure the swift return of individuals who entered Ceuta illegally, in accordance with applicable rules.”

“When it comes to our cooperation with partner countries, Morocco is a key and reliable partner for the EU. In recent years, we have intensified our cooperation in the areas of migration and border management, as well as the fight against smuggling. We are currently working to turn our relations into a comprehensive and strategic partnership,” the spokesperson added.

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