Germany is likely to shift toward wage restraint as inflation concerns mount

Summary:

Rising inflation has put pressure on social partners across Europe to adjust real wages to meet rising living costs. Yet, concerns have also been raised about the risk of a ‘wage-price spiral’ developing if wages rise excessively. The authors assess wage-setting in Germany, finding evidence that the country is likely to shift toward wage restraint in the coming years. If other eurozone countries are unwilling – or unable – to mimic Germany’s wage moderation, distortion of real exchange rates in the eurozone could follow, posing a threat to the single currency.