Workers in some of the euro zone's hardest-hit economies suffered steep falls in pay in real terms in the second quarter, as earnings growth across the 17-nation currency bloc sank to a near three-year low.
Official data Monday laid bare the euro zone's painful, drawn-out process of rebalancing, as its weaker members-- lacking the ability to devalue their currency--endure high rates of unemployment and stagnant or falling wages in a bid to become more competitive.
Officials hope the result will be healthier economies in the south that export more and consume and borrow less, as well as higher rates of consumption in the north.
That would help resolve a long-standing imbalance in the euro zone, seen by many as an underlying cause for the fiscal crisis that has threatened the bloc's existence.
Economists say that in the near term, the hit to workers' pay is suppressing consumer spending, making it harder for the region to resume sturdy growth after a long economic downturn.
A flagging economy worsens public finances as tax revenues fall and benefits payments rise. Workers' pay in the euro zone rose by 1.1% in the second quarter from the corresponding period of 2012, Eurostat, the European Union's official statistics agency, said Monday.
That is a sharp slowdown from a 1.8% annual rate of growth in the first quarter, and marks the slowest increase since the third quarter of 2010. Data for individual countries showed wages lagging the rate of inflation, or falling outright, in several of the countries worst hit by the fiscal crisis.
Wages fell 0.6% in Spain, 0.1% in Portugal and 4.6% in Cyprus in the second quarter from a year earlier.
In Greece, the most recent data available--for the first three months of the year--showed pay falling 10.1%. Italy and Ireland both reported a slowdown in wage growth to 0.5%.
In Germany, wages rose 2%. While that is also a slowdown from prior quarters, it means consumers in the euro zone's strongest economy continued to benefit from higher incomes in real terms.
"This might boost hopes that the periphery is regaining competitiveness relative to Germany, while rising wages may also persuade German consumers to spend more," said James Howat, an economist at Capital Economics, a consultancy.
But the slowdown in German wage growth is a concern and suggests the rebalancing process could be flagging. "All in all, while a recovery seems to be under way, the euro zone still faces a long internal adjustment," Mr. Howat said.
EU officials have presented falling wages in weaker economies as evidence the euro-zone economy is on the mend. European Council President Herman Van Rompuy in a speech in May said competitiveness is improving, citing the fact that labor costs--chiefly wages--were falling in inflation-adjusted terms in countries such as Ireland, Greece, Spain and Portugal.
But not all euro-zone officials agree that internal devaluation--where an economy's exports become cheaper because high unemployment allows firms to cut their labor costs--solves the bloc's problems.
If the pain is too severe the euro zone could suffer another round of spiraling debt costs and tightening credit conditions, as seen at the height of the crisis, said Lazslo Andor, the EU's top employment official, in an article this month for Brussels-based think tank the European Policy Centre.
"High unemployment rates and severe social problems can...lead to pressures on current and/or future public budgets and to social unrest," he said.
The results, he said, could include investors targeting the bond markets of weaker economies, and businesses and households facing "prohibitive" borrowing costs. In the short term, weak wage growth threatens the economic recovery by pressuring consumer spending.
"It is evident that workers in many countries are facing significantly falling real incomes which clearly limits the ability of consumers to play a major role in helping recoveries to develop," said Howard Archer, economist at IHS Global Insight, a consultancy.
The euro-zone economy emerged from an 18-month downturn, its longest on record, in the second quarter. Monday's data show wages growing more slowly than the annual rate of consumer price inflation, meaning workers' purchasing power fell.
The average price of consumer goods rose 1.4% in the second quarter, according to Eurostat data. The agency said its latest inflation data, also published Monday, showed consumer price growth slowed to 1.3% year-to- year in August, from 1.6% in July.
The rate is underneath the European Central Bank's target area of a little below 2%. Workers in the U.S. are also suffering declines in income in real terms, according to official figures from the Bureau of Labor Statistics.
Average weekly earnings in the U.S. fell 0.5% in inflation-adjusted terms in July, following declines of 0.1% in both May and June.
Differences in the way the data are measured, including the inflation adjustment made by the Bureau of Labor Statistics, mean the U.S. readings aren't directly comparable with those for the euro zone.
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Official data Monday laid bare the euro zone's painful, drawn-out process of rebalancing, as its weaker members-- lacking the ability to devalue their currency--endure high rates of unemployment and stagnant or falling wages in a bid to become more competitive.
Officials hope the result will be healthier economies in the south that export more and consume and borrow less, as well as higher rates of consumption in the north.
That would help resolve a long-standing imbalance in the euro zone, seen by many as an underlying cause for the fiscal crisis that has threatened the bloc's existence.
Economists say that in the near term, the hit to workers' pay is suppressing consumer spending, making it harder for the region to resume sturdy growth after a long economic downturn.
A flagging economy worsens public finances as tax revenues fall and benefits payments rise. Workers' pay in the euro zone rose by 1.1% in the second quarter from the corresponding period of 2012, Eurostat, the European Union's official statistics agency, said Monday.
That is a sharp slowdown from a 1.8% annual rate of growth in the first quarter, and marks the slowest increase since the third quarter of 2010. Data for individual countries showed wages lagging the rate of inflation, or falling outright, in several of the countries worst hit by the fiscal crisis.
Wages fell 0.6% in Spain, 0.1% in Portugal and 4.6% in Cyprus in the second quarter from a year earlier.
In Greece, the most recent data available--for the first three months of the year--showed pay falling 10.1%. Italy and Ireland both reported a slowdown in wage growth to 0.5%.
In Germany, wages rose 2%. While that is also a slowdown from prior quarters, it means consumers in the euro zone's strongest economy continued to benefit from higher incomes in real terms.
"This might boost hopes that the periphery is regaining competitiveness relative to Germany, while rising wages may also persuade German consumers to spend more," said James Howat, an economist at Capital Economics, a consultancy.
But the slowdown in German wage growth is a concern and suggests the rebalancing process could be flagging. "All in all, while a recovery seems to be under way, the euro zone still faces a long internal adjustment," Mr. Howat said.
EU officials have presented falling wages in weaker economies as evidence the euro-zone economy is on the mend. European Council President Herman Van Rompuy in a speech in May said competitiveness is improving, citing the fact that labor costs--chiefly wages--were falling in inflation-adjusted terms in countries such as Ireland, Greece, Spain and Portugal.
But not all euro-zone officials agree that internal devaluation--where an economy's exports become cheaper because high unemployment allows firms to cut their labor costs--solves the bloc's problems.
If the pain is too severe the euro zone could suffer another round of spiraling debt costs and tightening credit conditions, as seen at the height of the crisis, said Lazslo Andor, the EU's top employment official, in an article this month for Brussels-based think tank the European Policy Centre.
"High unemployment rates and severe social problems can...lead to pressures on current and/or future public budgets and to social unrest," he said.
The results, he said, could include investors targeting the bond markets of weaker economies, and businesses and households facing "prohibitive" borrowing costs. In the short term, weak wage growth threatens the economic recovery by pressuring consumer spending.
"It is evident that workers in many countries are facing significantly falling real incomes which clearly limits the ability of consumers to play a major role in helping recoveries to develop," said Howard Archer, economist at IHS Global Insight, a consultancy.
The euro-zone economy emerged from an 18-month downturn, its longest on record, in the second quarter. Monday's data show wages growing more slowly than the annual rate of consumer price inflation, meaning workers' purchasing power fell.
The average price of consumer goods rose 1.4% in the second quarter, according to Eurostat data. The agency said its latest inflation data, also published Monday, showed consumer price growth slowed to 1.3% year-to- year in August, from 1.6% in July.
The rate is underneath the European Central Bank's target area of a little below 2%. Workers in the U.S. are also suffering declines in income in real terms, according to official figures from the Bureau of Labor Statistics.
Average weekly earnings in the U.S. fell 0.5% in inflation-adjusted terms in July, following declines of 0.1% in both May and June.
Differences in the way the data are measured, including the inflation adjustment made by the Bureau of Labor Statistics, mean the U.S. readings aren't directly comparable with those for the euro zone.
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