'I may be crying wolf': Belgian economist calls for major change to wage indexations

'I may be crying wolf': Belgian economist calls for major change to wage indexations
Credit: Belga

An influential Belgian economist has called for a far-reaching overhaul of Belgium's wage indexation system in order to address the "substantial collective punishment" of soaring inflation and avert a potentially devastating wage-price spiral.

In a recent article published in the journal Economic Views ('Regards économiques'), Emeritus Professor of Economics at the Catholic University of Leuven Bruno Van der Linden noted that Belgium's current high inflation rate of 10.63% is "greater than that of [its] neighbours" and argued that the country's "institutional mechanisms and current market conditions do not constitute an appropriate response to this worrying situation".

In particular, Van der Linden claimed that Belgium's current — and almost unique — system of government-mandated wage indexations could potentially lead to a dangerous wage-price spiral, whereby wage rises lead to a surge in prices which then leads to greater demand for further wage increases.

Van der Linden also noted that the precautionary principle dictates that a reform of Belgium's wage indexation system should be implemented even though the National Bank of Belgium (BNB) recently forecast that inflation will slow to 4.4% by 2023.

"If the BNB scenario comes true, I may be crying wolf," he told l'Echo. "But... given the uncertainty, we must anticipate by equipping ourselves with several scenarios and we must prepare short-term measures, based on the precautionary principle."

Protecting the vulnerable

Van der Linden was careful to emphasise, however, that with many Belgians already resorting to desperate measures in their struggle to cope with soaring energy bills, the impact of an immediate cessation of wage indexations for all the country's citizens would most likely be disastrous.

Thus, Van der Linden recommends a scaled system, according to which wage indexation limitations become increasingly stringent as one climbs the income scale.

"It is necessary to temporarily limit the automatic indexation of wages and social benefits, but how to do it is crucial," Van der Linden writes. "A momentary suspension of automatic indexing... would, in the current context, have very worrying repercussions within the first deciles of the income distribution. To avoid this pitfall, it is recommended to keep the automatic indexation unchanged up to a salary or social allowance threshold and to limit it temporarily gradually beyond that."

To further cushion the blow to poorer Belgians, Van der Linden also proposes a range of price caps "in sectors whose viability is not threatened" by the current inflation crisis.

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"Whatever the European level decides on the capping of the price of natural gas, the revision of the gas and electricity pricing methods in Belgium should be a priority," he writes. "Relying on the expertise available in Belgium, the Belgian authorities should also quickly study the possibility of temporarily blocking certain prices in sectors whose viability is not threatened."

Van der Linden's remarks come against the backdrop of Belgians' overwhelming discontent with their country's current system of wage indexations. Many are angered by the fact that such indexations typically only occur after several months of high inflation have already passed, as well as by the indexations' general failure to keep up with the actual rate of inflation.

Belgium's current system of wage indexations was introduced in response to rampant inflation in the aftermath of the First World War. It is the only eurozone country other than Luxembourg in which both public and private wages are automatically indexed to inflation.

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