Business lobby ignores greedflation, promotes wage suppression

Of all business lobby groups in the Brussels theatre, BusinessEurope (BE) is the most prolific in feeding decision-makers in Parliament, Council, and Commission with economic analysis and statistics, including on inflation. The employers’ association has always been the first to warn against inflation, the first to suggest intervention to impose a stricter fiscal policy on member states, and to warn against rising wages for ordinary people.

In BusinessEurope’s view, there are few factors to consider when it comes to staving off inflation, and wages are by far the most important. So when all evidence points to the fact – and all key official institutions currently agree –  that exorbitant profits have been primarily responsible for the recent upsurge in inflation, they have ignored it. They haven't just ignored the evidence, their publications show they have consistently boosted the rhetoric on a completely hypothetical “wage-price spiral”, supported by surveys among their members and little more. As for the role of their own members' profits in fueling the cost of living crisis, they appear conveniently, and willfully, ignorant.

The business dogma: wage-price spiral

Generally speaking, inflation is not good for business. Companies want stability, and first and foremost, they want wages to be kept in check. Thus the traditional aim for businesses is to keep salaries from going up. The so-called wage-price spiral whereby higher wages lead to higher prices, which then again leads to pressure for higher wages, is the scenario feared the most by companies. This phenomenon – whether real or hypothetical, depending on the circumstances – is a traditional argument used by employers to avoid concessions to trade unions.

However, in the years before the cost of living crisis of 2022 and 2023 (or the inflation and energy crisis) inflation was not a major theme for business lobby groups as it was generally low. Since 2015 the euro area saw only a short period slightly above 2 percent in 2018, and at that point in time, wages were not seen by BE as the main concern. Their thinking about this minor increase can be seen in BE’s regular publication the Economic Outlook, used extensively as a lobbying pamphlet with the European Commission in particular, as it is distributed to Commissioners and civil servants. According to the analysis in the autumn 2018 issue of Economic Outlook, “two effects are expected to affect inflation in opposite directions. While the positive effect of higher energy prices on inflation is likely to fade over the course of 2019, supply constraints are expected to become increasingly binding, putting upward pressure on prices”.

In this phase, then, we saw a slightly less ideological BE putting its finger on one of the right spots: supply constraints. But when inflation became a real menace to peoples' livelihoods a few years later, BE picked a very different tone, one that sacrificed accuracy in order to protect their own interests. 

The cost-of-living crisis

Inflation in the EU took off in second half of 2021, fueled by the COVID-19 pandemic, followed in early 2022 by Russia’s invasion of Ukraine which impacted global energy markets as well as trade in grains, giving more impetus to inflation.

That was to have a major impact on the cost of living for millions of citizens. According to the EU statistics agency Eurostat, inflation in 2022 was a staggering 9.2 percent, whereas real wages (wages adjusted for inflation, a measure of purchasing power) fell by as much as 9 percent, indicating that wage earners paid for the crisis. While there are differences between member states, we saw the same pattern across the board, with citizens’ purchasing power plummeting. Prices on transport rose with 12.1 percent, whereas prices on housing, water and energy went up with a whopping 18 percent. In 2023 inflation began to wear off, but for most – and particularly for the poorest – the cost-of-living crisis was not over. Some prices, on food in particular, continued to remain high if not rising in 33 out of 37 European countries. Climate chaos has also impacted harvests and pushed up costs. Dramatic price rises include a 27 percent price hike on butter and 75 percent on olive oil.

If we zoom in on energy bills, prices reached a record high in 2022. In the second half of 2022, the average price of electricity went from €23.5 to €28.4 per 100kWh compared to a year earlier, and the price of natural gas increased from €7.8 to €11.4. Prices remained at that level well into 2023. In October 2023 the EUs statistics agency Eurostat reported that in the first half of the year, electricity prices and gas prices stabilized at the high level, with prices going up a notch to €28.9 and €11.9 respectively – the highest prices recorded by Eurostat.

Concerned businesses

Given that purchasing power was undermined as the crisis developed, it is not straightforward to argue that a wage-price spiral was at play. Indeed very few economists held that view: by far the dominant view among them was that one expressed by, among others, US economist Joseph Stiglitz, who underlined repeatedly that “it is not a demand problem, it is a supply problem”. In other words, inflation stemmed from weakened production due to disruptions in supply chains, not wages.

There is more. In 2022 another factor behind the inflation became clearer.

Profits began to go up at an extremely high pace. In the first half of 2022, German energy company RWE saw profits of €2.8 billion, a third higher than a year earlier, and Austrian energy company ÖMV 's profits were about 50 percent higher. The crisis offered opportunities for companies to raise prices and profits to a level far higher than earlier,  and what became known as 'greedflation' or 'price gouging' became the order of the day in some sectors, energy, housing, and food in particular.

BusinessEurope ignores IMF and ECB

When BusinessEurope analyses macroeconomic conditions, it normally quotes two sources at length: the International Monetary Fund (IMF) and the European Central Bank (ECB). This time around, however, the views expressed from these two institutions were useless and uninteresting for BusinessEurope. Curious, no?

Perhaps BE's reluctance to quote these mainstream economic heavyweights was because, according to the IMF, rising corporate profits accounted for as much as 50 percent of inflation, and named them the most important factor behind price hikes in Europe. Furthermore, the IMF experts considered rising wages as an effect and not the cause of inflation. They also suggested a likely solution, in that when “workers are pushing for pay rises to recoup lost purchasing power, companies may have to accept a smaller profit share if inflation is to remain on track”.

The European Central Bank's analysis echoed the IMF. According to its  President Christine Lagarde, profits stood for as much as two thirds of inflation in 2022, and in late June 2023, as assessment of ECB staff put the number at 60 percent for 2023.

BusinessEurope’s surveys as proof

Despite being the hitherto main sources cited on macroeconomic conditions, these assessments from the ECB and the IMF did not make it to the publications from BusinessEurope. On the contrary. As of late 2021, the Economic Outlook analysis from BusinessEurope until end of 2023, was dominated by the inflation crisis, but not once did the analysts mention how profits bore the brunt of responsibility. Instead, BusinessEurope let their publication become a pamphlet for a campaign against higher salaries in the context of a rapid rise in living costs.

In the autumn 2021 edition, the tone was struck: “Wage moderation will be important in ensuring that temporary price rises do not give rise to a damaging wage-price spiral, forcing both a premature withdrawal of monetary policy support, and risking damaging Europe’s global competitiveness and causing permanently higher inflation.”

Fear as documentation

However, the BE analysts were seemingly struggling to find the documentation for the claim that higher wages were the main threat. And since no authoritative source was around, they turned to their own members' subjective opinions instead. For the summer 2022 edition of Economic Outlook, they asked their members, the national employers’ associations, and they seemed to be anxious:

“Over 65% of our federations have reported being very concerned about a wage-price spiral, with a further 11% of federations suggesting that such a spiral is already the case in the member states where they are located. In the coming months, social partners need to engage responsibly in collective bargaining on wages and help ensure that temporary price rises do not give rise to a damaging wage-price spiral.”

This method was repeated in the spring 2023 edition, according to which almost “90% of BusinessEurope member federations indicate they are concerned about current wage developments and the prospect of a wage-price spiral in particular.”

BE is not blind to the adverse consequences of inflation for consumers due to its potential effect on wages. In autumn 2022 they feared that wages would go up in the face of historically high “quantitative price expectations from consumers” with the ECB observing a “steady and sustained rise in medium and long-term inflation expectations in parts of the population”. But as before, their response carefully avoided any mention of profits and their effect on inflation – according to the ECB a very manifest phenomenon at the time.

That fear has not worn off. And BusinessEurope is betting on trade unions to show more solidarity with the employers. In the current  climate, they argue in the autumn 2023 Economic Outlook that it is “crucial that social partners engage responsibly in collective bargaining on wages and help ensure that temporary price rises do not give rise to a self-defeating wage-price spiral”.

Lobbying against wages

These messages were not just for internal consumption. Economic Outlook is a lobbying tool, and it is routinely sent to key EU Commissioners, and were on more than one occasion used in connection with meetings with Commissioners about the state of the economy, as in November 2022 when representatives of BusinessEurope had separate meetings on the “economic outlook” with Competition Commissioner Vestager and Commissioner for trade and economy Dombrovskis, both Vice Presidents of the Commission. In fact, meetings between BusinessEurope and top Commissioners on the general state of the economy seem to be a tradition in mid November, shortly after the publication of a new version of Economic Outlook. This is certainly so in the case of Commissioner Dombrovskis, who met with representatives of BusinessEurope to discuss “the economic outlook” in 2020, 2021, 2022, and 2023, according to Dombrovskis public register of meetings.

On these occasions, BusinessEurope delivers the conclusions from the Economic Outlook pamphlet, as in November 2022 when a letter from BE ahead of the meeting asked for support to reduce energy costs for businesses, and reiterated the view that social partners, ie. trade unions,  ought to help the employers prevent wages from going up.

Fight over inflation to continue

There is nothing new or original about high profits impacting inflation. That profits and wages can both contribute – and have equivalent effects – has been a standard theme in economics for many decades. But for BusinessEurope, such a focus is a no-go. With member companies who have enjoyed immense profits throughout the cost-of-living crisis, they preferred to remain selectively ignorant, avoiding citing even the institutions they would normally cite as sources. Instead they went for a view of inflation that suits their interests.

It is very likely that this inflation dynamic will become more prevalent in the future as there is a link between market concentration and the ability of big companies to set prices as they please. To some renowned economists, this phenomenon of ‘sellers inflation’ “in which large firms are pricemakers”, makes it desirable if not necessary, to open a new era of price controls and taxation of profits.

As for the political debate in the EU institutions, it is very important that the myth creation of BusinessEurope is contested openly. Not only is their take on inflation designed to let wage earners pay for the crisis, it is also not a remedy to inflation. It is about time, then, to open a new chapter. One where price controls and taxation of windfall profits become standard political tools. The employers may want to ignore the many harmful effects of super profits, but society at large in general, and wage earners in particular, cannot afford it.