Belgian Wage Index, Slammed by ECB, Triggers Another Pay Raise

By Fergal O'Brien

Aug. 28 (Bloomberg) -- Belgian public-sector workers in October will receive their third pay increase this year under a wage-indexation system that has been condemned by the European Central Bank for potentially contributing to a wage-price spiral.

A consumer-price index in Belgium this month rose above a level that triggers a 2 percent wage increase, boosted by food and fuel costs, according to the Economy Ministry in Brussels. The raise, the third since January, also applies to pensions and unemployment benefits in the euro area's sixth-largest economy.

Defended by labor unions that say it protects living standards and prevents strikes, wage-indexation systems have been attacked by ECB President Jean-Claude Trichet as ``extremely dangerous.'' With euro-area inflation at double the ECB's 2 percent ceiling, policy makers are concerned workers will demand more pay to compensate for the higher cost of living and companies will raise prices to cover rising labor costs.

``This is a country where the risk of second-round effects and a price-wage spiral is the biggest,'' said Dominique Barbet, an economist at BNP Paribas in Paris. ``Once you have started igniting inflation, it is very difficult to stop it, so certainly it is a problem.''

Used in seven of the euro area's 15 member countries, wage indexation links pay increases to inflation and is most prominent in Belgium, where it covers almost 100 percent of workers, according to the ECB. Cyprus and Luxembourg, two of the euro region's smallest members, also have systems for automatic adjustments for price increases.

Spending Power

In Spain, many wage settlements include clauses for workers to recover spending power lost through inflation in a system that affects about two-thirds of the workforce. France, Slovenia and Malta also have some form of indexation, according to the ECB.

Second-round effects are a ``general problem for all members of the euro area,'' Trichet said in July after the ECB raised its key interest rate to a seven-year high of 4.25 percent. ``It's particularly true for those who have indexation schemes.''

While Belgium's indexation measure -- the health index -- excludes tobacco and gasoline, it includes home heating oil, gas and electricity. The 66 percent jump in crude-oil prices in the past 12 months has pushed the index to its biggest annual gain in at least 14 years.

Pensioners and those on unemployment benefits receive an automatic 2 percent increase in payments when the index crosses a trigger level, followed by public-sector workers. The index is also taken into account when unions in each industry negotiate pay increases.

`Social Peace'

``It's a system of social peace we have in Belgium,'' said Karel Gacoms, regional secretary of labor union FGTB. ``The minimum we need for the workers is inflation. Otherwise, the workers would have a problem when they go'' shopping.

Belgian central bank governor Guy Quaden, who is also a member of the ECB governing council, has defended the country's indexation system, though he has indicated he may be in favor of limiting its applicability.

``The Belgian system has worked until now. I hope it will go on doing so,'' Quaden said in June. ``For people with the highest income, should they benefit from the same advantage? That's a question I'm asking myself.''

Figures published today showed inflation in Belgium eased to 5.4 percent this month from a 24-year high of 5.9 percent in July. Quaden said in an interview in Trends magazine last month he is ``not proud'' of the consumer-price increases, the second- highest in the euro area, after Slovenia.

Labor Costs

For companies in Belgium, rising labor costs are eroding competitiveness, threatening economic growth in a country where exports account for more than two-thirds of gross national product. Belgian labor costs jumped 1.4 percent in the first quarter from a year earlier, compared with a euro-area average of 0.1 percent, according to the Organization for Economic Cooperation and Development.

``In the last two years, our labor costs have increased much more rapidly than our competitors Germany, Netherlands, France,'' said Geert Vancronenburg, an official at the Federation of Belgian Enterprises in Brussels. The federation wants to start talks with unions on changing how indexation operates to curb labor-cost increases, he said.

For the ECB, ``rigid'' wage systems may slow the pace at which inflation eases even as oil prices decline from a record. Crude oil was trading at $119 a barrel today, 18 percent below the all-time high of $147.27 reached on July 11.

``In the euro area, we have a higher degree of rigidity of prices and wages than in the U.S.,'' ECB council member Axel Weber said in an interview published yesterday. ``For this reason, we have to closely monitor inflation developments, detached from the stability norm, because inflation rates tend to return to it only slowly.''

To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net.