HS Analysis | Finns suffer from Germany’s large wage increases

Again did this happen to us Finns?

The kind student in the class has followed the rules, but still ends up being the victim.

Joyous salary parties have been celebrated in Germany and elsewhere in Europe at the same time as Finland has settled for moderate increases in order to prevent inflation.

Despite this, the number of celebrations is falling for Finns.

The most recent statistics show that wage increases, especially in Germany, have been distributed so sloppily that because of them inflation in the euro area is still galloping too fast.

This means that when inflation has not been brought under control, the European Central Bank cannot lower its key interest rates as rapidly as was imagined just a moment ago.

In May, the rise in consumer prices accelerated again and slightly more than expected, i.e. 2.6 percent year-on-year. Inflation was pushed up especially by the increase in wages in the service sectors, as the sector suffers from a labor shortage.

Inflation in the service sectors accelerated to as much as 4.1 percent.

So the fight against inflation is still not over in Europe.

To Finland this is a problem, because it is the Finnish economy that has been crying out for interest rate cuts for a long time. In other countries, the need for interest rate cuts is not as acute.

In Finland, variable-rate Euribors are preferred, elsewhere long-term fixed rates, where the effects on the economy are slower.

This week’s rate cut on Thursday is already set in stone, but the following ones are not.

The market believes that instead of the previously expected three interest rate cuts, this year we will only see two koruna reductions from the ECB. After Thursday’s bill, the next one is expected in December.

For next year, the market expects only two interest rate cuts instead of the previous four. The first interest rate cut would be in April next year.

This would be bad news not only for mortgage debtors, but also for Finland as a whole. A slower-than-expected pace of interest rate cuts would hold back the recovery of the Finnish economy, as the economic growth of the entire economy is largely dependent on interest rate cuts.

Do you feel unfairly?

The importance of salary moderation has been hammered into the heads of Finns by work. There were plenty of warnings about the perniciousness of the wage-inflation cycle, for example, in last year’s wage round.

And the message has gone through. Finns have compromised on salary increases for the common good.

Now, however, it is not rewarded. Vice versa.

Especially in Germany, wages have risen at a record high in the beginning of the year.

In the first quarter of this year, the nominal wages of Germans rose by 6.2 percent year-on-year. When the effect of inflation is removed from the figure, real wages rose by 3.8 percent, a record high. The increase in nominal wages is also almost at a record level.

Elsewhere in Europe, salary increases have also been distributed generously. For example, ten percent increases were widely agreed upon in Austria last year. Heavy increases have also been seen in the Netherlands.

In the entire euro area, nominal wages rose by an average of 4.7 percent.

In Finland, the nominal earnings of wage earners rose by an average of 3.9 percent year-on-year at the same time. When inflation is taken into account, the increase in real earnings of Finns remained at 1.1 percent at the beginning of the year.

Finnish companies from this point of view, salary moderation has been a good thing and a clear competitive advantage.

The slower rise in the price of labor has improved Finland’s cost competitiveness for ten years already.

According to the data collected by the Bank of Finland, the price of Finnish labor has decreased practically in a trend-like manner since the financial crisis, when compared to trading partner countries.

Since 2013, there has been a decrease every year except for 2021. At the same time, the growth of labor productivity in Finland has been slower than in competitor countries.

According to the EU Commission’s forecast, the price of labor is expected to fall in Finland again this year in relation to comparison countries. Next year, it is predicted to turn to a slight increase.

European former governor of the central bank Mario Draghi tackled the problem of the development of wages and cost competitiveness in his speech in Brussels in April.

Draghi’s message is also interesting for Finns.

Draghi’s concern was not about the rise in wages, but what happens when attention is focused on preventing wage increases. This is what happened in Europe after the debt crisis of the early 2010s.

Draghi himself served as ECB President at the time.

At that time, the competition within the euro area was to see which country could best keep wage increases under control and thus improve its cost competitiveness.

According to Draghi, this was a mistake. At that time, the Eurozone suffered in relation to the United States, where instead of wage moderation, the focus was on creating growth. The citizens also became prosperous, unlike in Europe.

Draghi’s most important message was that instead of cost competitiveness, it would be much more important for the euro countries to invest in increasing productivity. It would also enable higher wages and the economy would grow.

Are we now in a similar situation, where the well-being of Europeans increases, but the Finns do not?

Danish Bank’s chief analyst Minna Kuusisto has closely followed wage developments in the euro area and especially in Germany.

Especially in the service sectors, wages have risen faster in Germany. It was also visible in the inflation of the service sector, which is galloping faster than other sectors.

However, Kuusisto has an understanding for the large salary increases of Europeans.

“Bigger wage increases are in order, because wage earners have, in a real sense, become significantly poorer over the past two years. So there is a lot to catch up on,” says Kuusisto.

Real impoverishment means that prices have risen more than wages.

However, in Kuusisto’s opinion, there is no reason to worry too much about big salary increases because of inflation.

The feared price-wage spiral is not yet visible, because companies have no longer been able to fully transfer the increased wage costs to the prices of the products they sell. The reason for this is the waning of demand.

However, the ECB will be cautious and monitor wage developments closely. Kuusisto is sure of that.

He emphasizes that the ECB is not necessarily in a terrible hurry to lower interest rates. There is no rush, because the economy in the euro area has withstood high interest rates quite well. Finland is an exception.

Should Finns feel betrayed when the interest rate crisis is now threatening to be prolonged, but wages are not rising at the same pace as elsewhere?

“If the earnings level in Finland rises more slowly than others, it is certainly good for Finland’s cost competitiveness. On the other hand, Finland does not currently have a competitiveness problem. The flip side is, of course, that Finnish households are not getting richer at the same pace as other Europeans,” Kuusisto assesses.

According to him, Finland’s salaries are not bad overall compared to the euro area, although they may have lagged behind Germany.

Kuusisto also reminds that Finnish households also benefit from Finland’s lower inflation. Purchasing power is improving. And interest rates will eventually go down too, albeit a little slower than previously expected.

Size the problem of course boils down to the fact that Finland has a common monetary policy with the euro countries, but a different economic situation.

The Finnish economy has plowed much deeper than others. Here, interest rate reductions would have been needed much earlier.

“The problem is made worse by the fact that it has not been possible to compensate for the situation with fiscal policy either, because it has been decided to quickly fix the deficit of the public finances”, notes the director of Labore Mika Maliranta.

According to him, it would be immediately positive for the Finnish economy if the ECB lowered interest rates. In the longer term, what is important is how Finland’s cost competitiveness develops.

So far, salary restraint has been maintained when there has been a need for it.

“My concern is whether we can maintain this kind of temper in a conflicted labor market situation when the next pay round starts in the fall,” says Maliranta.

If the situation escalates into a conflict, the threat is that cost competitiveness will begin to erode, he estimates.

Is it anything to do about the situation?

It is impossible to change the situation right now, but in the future it is worth considering whether it would be worthwhile to reduce Finns’ sensitivity to interest rates and replace Euribor with long-term fixed interest rates like in other countries.

Even if they were slightly more expensive, the changes in key interest rates would not shake the economy of households and the country as a whole as drastically as the Euribors do now.

Salaries are a more difficult tick. How to combine the interests of employees and companies?

The answer is productivity growth. If companies invested in that and not in gaining competitiveness with cheap wages, everyone would benefit.

More salary payment funds would be created and the economy would grow.

If nothing is done, Finns’ salaries threaten to fall behind other countries, especially for those with higher education. It threatens to come from Finland then country of low wages.