All of Europe is Haunted by Falling Purchasing Power

Inflation is running fast and the issue of purchasing power bores its way into many European countries. To such an extent that the Slovenian Prime Minister, Janez Jansa, had to acknowledge that “high inflation is a problem for Slovenia.” Although his country is hosting the European Union (EU) presidency, he dared point his finger at the single currency : “The introduction of the euro has contributed to an acceleration of inflation by 0.6%.” Ljubljana adopted the single currency in January 2007 with an inflation rate of 2.7%, and now has a record rate of 5.7%. Even worse is the price rise of 11% for food products, which creates a lively dissatisfaction. Last November, the candidate supported by the government for the presidency of the Republic was defeated, mainly because of this purchasing power issue.

Rent, energy, food …

Slovenia reflects Europe’s image. In every country gauges point to red : +2% in France, +9.6% in Estonia, which still has a long way to go to fulfil the euro currency criteria. At the same time, in December Eurostat even announced a 3.1% inflation for a year for the euro zone, a figure never seen for six and a half years. Explanatory factors are the same everywhere : higher costs for energy, food, rent, and most importantly a more and more unfavourably sharing of wealth for workers ; wages being constantly decreasing with respect to value added.

Last year, house prices went up everywhere in Europe, except in Sweden. According to Eurostat’s consumption price index, prices rose by 3.6%. In Spain, the housing issue made its way to the top of the list of main political questions. Since 85% of Spanish households own their properties, leases are rare and expensive. Housing costs increased by 5.1% in main provincial cities last year. Since 1985, a new house saw its price quintupled. Last year, this led young people to fight against the difficulties to find a place to live. The National Youth Council illustrated this problem in a report : young people would need to earn 126.05% more not to be excessively indebted when they buy a place to live !

At the beginning of this year, announcements of higher energy cost attract the most attention. Oil prices, which reached $100 a barrel, account only partially for those increases. Privatisations and deregulation have had the effect of forcing prices up. Investment costs for entry into the market leave room for only an oligopoly of a few competitors. This is the case for Germany where bills have increased by 50% since 2000, making the price of electricity one of the top concerns of the population. In the United-Kingdom, Alistair Darling, the Chancellor of the Exchequer, was seriously worried when the fourth operator of the country revealed a 17.2% increase for gas and 12.7% for electricity prices.

Higher cereal prices

The expense item most painful for the household is for food. Food prices increased by 5.1% in the EU – in line with prices on the world markets. In December, The Food and Agriculture Organization of the United Nations (FAO) revealed that the global food index jumped from “about 40% in 2007 as compared with 9% in 2006.” Those increases prompted new speculation. According to FAO global cereal market’s analysist, Abdolreza Abbassian, higher prices can be explained by three factors : “production problems in the most productive zones,” because of natural disasters, “extremely low cereal stocks : the lowest for 30 years,” and an increasing demand, because of the long term increases in population and wealth, which lead certain peoples to change their food consumption. Moreover, there is an “emerging demand” for biofuel, which brings instability to the cereal markets.

Worrying Vicious Circle

More globally, fluctuations on the energy markets, in raw material, and housing, account for only one part of the falling purchasing power. In the long term, the wealth distribution in favour of shareholders since the 1980s has been to blame. Thus, according to the European Commission’s figures, the share of wages in value added fell by 8.6 points in the EU between 1982 and 2006, to the profit of capital.

The European Trade Union Confederation has noted this structural reason in its resolutions on collective negotiations for the year 2007. The trade union executive committee explains that “wages are under pressure from the European Economic model.” According to the document, “Unlimited capital mobility in the European marketplace is used to set up a de facto coordination of business demands.” Moreover, “competitive wage moderation is triggering a vicious circle of weak domestic demand leading to low overall growth, thereby setting the stage for a next phase of concessions by workers.” A strategy running smoothly for shareholders, but which could be countered in 2008. The economic media is already worried about “aggressive demands of increase” for this year in Europe.