Multiple Wage Bargaining Systems in the Single European Currency Area

Abstract

Little attention in the EMU literature has been paid to the interaction between central bank monetary rules and systems of collective wage bargaining. Analytically and empirically, coordinated wage bargaining systems respond with real wage restraint to non-accommodating monetary policy. Since wage determination is dominated by collective bargaining in all the EMU member states and wage coordination within the member states has grown since 1980, this is a topic of potential importance. In particular, the replacement of the Bundesbank, directly targeting German inflation, by an ECB targeting European inflation has removed a major institutional support of wage restraint in Germany. The consequences of this for EMU are worked out under two scenarios, that inflation expectations will be generated by ECB monetary policy and that they will reflect German inflation outcomes. Possible institutional developments are discussed including government-union bargains. The Bundesbank has also played a major role in maintaining fiscal rectitude by targeting excess fiscal deficits in Germany: again its replacement by the ECB — targeting (if at all) European rather than German fiscal policy — loosens fiscal constraints. For underlying structural reasons therefore, it is possible that Germany and other EMU countries will move to a period of fiscal activism with wage restraint and low inflation purchased through social contract negotiations.