The governor says that monetary and fiscal policies need to recognize the challenges of the labour market.
There are “few reasons” to anticipate inflationary spirals fueled by wages in the Eurozone, but the Governor of the Bank of Portugal recommends “prudence” in wage increases and makes it clear that these should be determined by productivity gains. In an analysis of the labour market released this Monday, Mário Centeno also emphasizes the need to protect employment. He warns that an excessive contraction of monetary policy may be “incompatible” with the “aspirations of workers.
In Europe, the labour market has functioned as a protection, shielding incomes from the unforeseeable impacts of exogenous shocks. However, the Eurozone stopped growing a year ago. If it hadn’t been for employment, inflation and stagnation would have resulted in stagflation,” describes the official, detailing that European economies only escaped this scenario because companies interpreted inflation correctly as a “temporary phenomenon.
Mário Centeno, therefore, gives four reasons for this positive result.
- First, the credibility of the European Central Bank (ECB).
- Second, the fact that inflation was generated by supply, leading to an “immediate reduction” once shocks in these chains dissolved.
- Third, fiscal policies that avoided overly expansionary measures.
- And finally, the flexibility and mobility of the labor market. “However, complacency is unwarranted,” he warns, arguing that monetary and fiscal policies must recognize the challenges posed to the labor market.
In this context, the role of policies should continue to be stabilization, he says. And he advises patience to policymakers. “We must, therefore, remain faithful to the principles of recognizing the data, reporting the findings, and reacting only if, but whenever, necessary”, he notes.
However, he warns that the “aspirations and investments of workers” are “incompatible” with an excessive tightening of these policies.
On the other hand, Mário Centeno makes it clear: prudence should guide wage increases. And he believes it is necessary to safeguard employment and its flexibility, take advantage of migrations to expand the market, and not ignore inequalities between countries, so that prosperity and stability are shared by all.
“The labor market remains the euro area’s greatest asset and must be preserved“, emphasizes the Governor of the Bank of Portugal.