Avoiding the price-wage race, a winning bet for companies and employees

There is currently a debate among economists and economic policy makers (monetary and fiscal) on the appropriate strategies to deal with inflation. The consensus that has not yet disappeared in France and Europe was to avoid following the US authorities in raising interest rates. This consensus is weakening, although there is no lack of arguments to support it.

French and European macroeconomic policies are at a crossroads at the end of September and the automotive industry is both a witness to this and a potential beneficiary and/or victim. Indeed, until the end of the summer, France was still largely living under the influence - or even the umbrella - of a double gamble.

The first was that of Christine Lagarde, who refused to align ECB policy with that of the Fed, even if this had an impact on parities and led to a problematic depreciation of the euro. Underlying this gamble was the priority given to the sustainability of public debt in the euro zone.

We know that, since Mario Draghi, the ECB has agreed, in order to save the euro, to change its stance and doctrine in order to remove the question of the assessment of the quality of public debt from the appreciation of the markets and thus considerably reduce the spreads of which the "club med" was victim.

The readjustment of economic policies over the last 10 years and, since 2020, the management of the Covid crisis and the constraints placed on States to favour an accelerated ecological transition have thus taken place in a context of relatively expensive budgetary policies that the ECB wishes to allow States to assume without too much damage first and then possibly to continue.

In order to justify the continuation of her policy, or at least its very slow and prudent reversal, Christine Lagarde defended an analysis according to which the price increases linked to certain shortages generated by China's "zero-covid" policy maintained during the recovery and then to the Ukrainian crisis were not sufficient to consider that an inflationary dynamic was taking hold in Europe: These price increases were reversible and the non-existence of indexation mechanisms similar to those that fuelled the disinflation policies of the 1980s should have allowed the price-wage chase to take place. Under these assumptions, the ECB considered that it should hasten as slowly as possible to raise its rates and/or reduce its debt buyback programmes.

The second bet was the government's and it fitted in with the previous one. Indeed, to prove Christine Lagarde right, the French government decided to use the budgetary weapon once again to protect French households from a major part of the price increases, those of energy. The cost of the measure (more than 45 billion euros) is high but if real interest rates remain negative or, at worst, zero, the problem is not insurmountable.

Above all, by doing so, we maintain a relatively limited rate of inflation and more probably avoid a price-wage spiral which would remind the older among us and make the younger discover the memory of inflation which is self-perpetuating and thus becomes the major economic evil against which the economic policy makers fight as a priority, even if it means significant increases in unemployment.

A. Minc defends the government's gamble and presents it as typically 'uncooperative' insofar as few governments in Europe have done the same: for him it is the equivalent of a 'competitive devaluation'. He told Les Echos on this subject: "Wage demands are based on much lower inflation expectations here than elsewhere. We are the only country in continental Europe in this situation. This is a good thing. If, over two years, wages increase much more in our neighbours than in our own country, this will enable us to regain competitivenesś of labour. And we are talking about a positive shock that could be 8% over the period. This is the result of an intelligent use of the fiscal weapon."

At the beginning of September, a certain consensus still persisted in France among economists in support of this original double bet. At the end of September, doubt seemed to creep in and Christine Lagarde had clearly committed to a policy of rate increases and suggested that it would continue.
An economist such as Patrick Artus, who was still talking about the "ECB's gamble" in Le Point on 17 September, already indicating that it was less and less sustainable, declared in Les Echos on the 23rd that "To bring inflation down, you have to bring unemployment up" and indicated in Le Point on the 24th that what is happening is going to force us to make, in terms of public finances, the choice of austerity that C. Lagarde and E. Macron had done everything to avoid.

However, the die is not quite cast because economists such as Daniel Cohen and Eric Heyer still insist that wage earners are finding it very difficult to obtain indexation today.
The result is that the famous spiral has not taken hold and that we could return to low inflation quickly. Once digested, thanks to state aid or company bonuses, for example, certain one-off price increases could be absorbed.

If, as everyone thinks today, certain prices such as those of energy or raw materials are adjusted because we intend to assume the additional costs linked to the transition, wage increases may make it possible to cope with this, but this does not necessarily imply that, every year, in the decade to come, the same will happen: once relative prices have been adjusted thanks to sustainable increases in the prices of certain goods, there is nothing to prevent the famous spiral from taking hold. Inflation can go down. This is what Eric Heyer told Franceinfo when he said:
"For the future, the central scenario is that inflation will gradually return to more measured rates thanks to aid and the "tariff shield" put in place by the government. China will lift its restrictions in the next few months, the Ukrainian crisis will be felt less and there will probably not be a price-wage loop that will be triggered, as wage increases remain measured. In this scenario (...), inflation returns to around 2% at the end of 2023 (...) Even in this scenario where prices stop rising, my feeling is that the price level will remain higher than before the crisis."

As can be seen particularly clearly in the automotive sector, the other dimension of this non-indexation, which is favoured by the government's fiscal policy of cushioning the inflationary shock, is that companies and their margins suffer relatively little from what is happening.

Whereas the chase between prices and wages tended to favour the latter in the years of high inflation when corporate profits suffered greatly, the reverse is true today, particularly in the automotive sector.
The shortage of semi-conductors and the shift to electricity justify an extraordinary increase in catalogue prices that is not cushioned by the usual "commercial gifts". This is being passed on by the OEMs and the manufacturers seem to accept it. Everyone complains about these cost increases but - as is the case with the shortage of semi-conductors -, in view of the half-yearly results that the various companies are delivering, everything indicates that the capacity to pass on these problems without too much damage to the less numerous but more solvent consumers largely compensates.

In such a context, wage negotiations should lead employers to let go of some of the ballast. This is what happened at Renault with the granting of bonuses last week. The NAO are still to come and they will be tense, but the balance of power that has been established at Renault as at Stellantis between management and employees thanks to the competition between French employees and those located in the rest of the European industrial organisation will most probably allow wage increases to be limited to levels that will continue to allow wages to lose the chase.

Paradoxically, French employees have at least as much to lose by seeing the fight against inflation become the macroeconomic priority as by seeing their purchasing power eroded by under-indexation. Indeed, the electricity and energy transition requires a state infusion which is the only way to ensure that volumes take off and that the damage to employment is not terrible.

This infusion must be defended and low rates will largely facilitate this defence. Of course, if the employees had some assurance that these state subsidies would only be obtained by the manufacturers or their customers on condition that employment in France was privileged, this would make the argument more audible.

26/09/2022