Wage fears keep Trichet shadow-boxing

By Brian Love - Analysis

PARIS (Reuters) - If pay rises have been modest for years, why is the European Central Bank talking up the risks of a "wage-price spiral" reminiscent of recession and the birth of mass unemployment in the 1970s?

As the ECB increased interest rates on Thursday, the answer looked less about evidence of serious wage-surge and more about proving that the ECB means business when it pledges to prevent inflation getting out of hand in the longer term.

That will not spare the central bank the difficult task in the coming weeks of explaining its decision to increase euro zone rates by a quarter-point to 4.25 percent.

Perhaps the hardest question the ECB has to answer is how a rate rise can curtail inflation caused by sky-high oil and food prices, which have more to do with Chinese demand for crude and agricultural commodities than the ECB-influenced cost of credit.

That is a question French President Nicolas Sarkozy asked in advance of Thursday's ECB decision, and by others including Bert Ruerup, one of a team of experts that advise German's government on economic policy.

Another big question is one raised by labor unions, who say wage gains have been and remain within the bounds permitted by productivity growth and that the central bank is unjustifiably scaremongering.

That point of view got some independent support this week in an OECD report which forecast slower wage gains this year across the industrialized world and nothing excessive in 2009.

"Mr. Trichet should look at the facts," says Ronald Janssen, a policy adviser at the European Trade Union Confederation.

Collective bargaining agreements in the public services and chemicals sectors of Germany and in the Italian metal sector had fixed a reasonable three percent increase for 2009, he said.

"Given the fact that wage bargainers in Europe informally coordinate...the three percent figure will certainly serve as benchmark for upcoming new agreements. It is hard to see how the percent wage growth would trigger a wage price spiral.

NOT QUITE THE '70S?

In a statement issued in response to the ECB decision, ETUC deputy secretary general Reiner Hoffmann said: "The ECB should realize that we are no longer living in the seventies."

Trichet made no attempt at a post-meeting news conference to demonstrate or quantify the danger of what he calls second-round inflation pressures from wages.

He insisted that the ECB's job was to fight inflation and to convince the euro zone's 320 million people that it could be sure the job would be done.

Big wage rises to compensate for the cost of fuel and food prices would merely plunge Europe back into the misery that such tit-for-tat rises in pay and prices inflicted on Europe after the oil-supply crisis of 1973, he said.  Continued...