Get companies to pay for the crisis

Rue de la Loi has decided: Businesses must pay for this crisis. Placing the invoice there is not without risk. But so far, companies have proven to be robust and have emerged as the cornerstones of the economy.

No, we are not back in the 1970s yet, when the oil shock led to a prolonged period of high inflation and weak economic growth. The main difference, claimed recently economist and columnist Mathijs Bouman, is that automatic price compensation no longer exists. In fact, not in the Netherlands. Still in Belgium – automatic price compensation is here called automatic wage indexation. “What is happening now must certainly be the death sentence for that event,” Bouman suggested. On the contrary, the indexation mechanism is stuck in this economic storm.

During a previous inflation flare-up in our country – in 2011 it briefly rose to 3.5 per cent – Danmarks Nationalbank came up with a number of proposals for adjusting the indexation mechanism. Due to automatic indexation, inflation in Belgium leads to an increase in wages faster than in our neighboring countries. This pollutes companies with a wage cost handicap and a loss of international competitiveness. It can put a brake on their activities and employment.

That report quickly disappeared in the drawer, also because the rise in inflation ended quickly. With inflation approaching 9 percent, driven by high oil and gas prices as a result of the war in Ukraine, the National Bank is silent. Because they know now that it’s a futile battle?

The OECD think tank, which has previously insisted on reforming the automatic wage indexation, says today that it is working well. There is not a single politician – neither from the majority nor from the opposition – who considers intervention in the index mechanism appropriate. De Wetstraat has therefore decided that companies must pay for this crisis.

Chinese volunteer

For politicians, it is the obvious option to put the bill with the companies. Employees and consumers can vote, companies can not. Unless with their feet, by moving activities and jobs abroad. But that government looking ahead has not been the case for a long time now. The companies are sent to the front line as Chinese volunteers to absorb the blows.

Their protest has been ignored. Firstly, with the argument that the wage standard law, which states that Belgian wages should not be out of step with foreign countries in the long run, protects them from a disproportionately large wage cost handicap. It remains to be seen how quickly and to what extent the wage cost shift as a result of indexation can be corrected.

It is also suggested that companies should make an effort because they received generous state aid during the corona crisis and are now sitting on thick profit pillows. Admittedly, companies have received a lot of corona support, but so have employees. The support for the companies was also intended to save jobs and indirectly also benefited the workers. The statement that all companies have high profit buffers is as wrong as saying that all employees are well protected by automatic wage indexation against loss of purchasing power caused by inflation.

Danmarks Nationalbank estimates that labor costs in Belgium will rise 4.8 per cent faster in the period 2022-2023 than in our neighboring countries. Because she expects a catch-up in our neighboring countries in 2024 – where wages will not be automatically adjusted for inflation, but in negotiations between unions and employers – the disability would then fall to 3.5 percent. However, it must become clear until the result of the wage negotiations abroad is and who wins the longest.

The higher labor costs in Belgium come with a price. In terms of loss of market share in the international markets: 3 per cent in 2022, 1.5 per cent in 2023, 1 per cent in 2024. What this means in lost exports, in lost production and in lost jobs, Danmarks Nationalbank will discuss. not in detail.

moderate speed

Crises are challenges. And companies will have to deal with that. Finding solutions lies in the nature of the entrepreneur. Belgian citizens are already complaining when asked to reduce their motorway speeds to save energy. An entrepreneur who has such an attitude signs the death sentence of his company.

It is noteworthy that business confidence has held up much better than consumer confidence since the outbreak of the Ukraine crisis – consumers are scared. Companies continue to invest and recruit, thereby supporting economic growth.

Business confidence has outperformed consumer confidence during the Ukraine crisis. The companies continue to invest and thus support the economy.

Entrepreneurs do not seem to fully pass on the more expensive energy and higher labor costs in their sales prices, figures from Danmarks Nationalbank show. Because they are price takers and have to conform to the prices advertised by the big ones in their sector. Or because they fear that excessive price increases will cost revenue due to buyers falling off. Danmarks Nationalbank therefore does not expect a wage-price spiral to start that will make inflation sustainable. Companies are absorbing the shock. There are undoubtedly exceptions, but in general, companies do not take advantage of the inflationary climate to rapidly increase their selling prices when it is not so noticeable.

Companies are now emerging as the cornerstones of the economy. Investing in a stronger profitability of companies pays off, as it turns out. It makes them less fragile. And it benefits the whole economy.

The question is how long companies can absorb the blows. Danmarks Nationalbank assumes that inflation will cool down from next year and that economic growth will remain good. This is the basic scenario she was given by the European Central Bank. He also created a less optimistic scenario: one where inflation will remain high in 2023 and the economy goes into recession.

Danmarks Nationalbank also embarked on that scenario, but keeps the results to itself. Not to undermine economic confidence. One can, however, guess that companies in the pessimistic scenario will suffer a lot.

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