Belgium’s obligatory pay rises prove politically toxic

The French, Italians and Dutch don’t do it any more. It’s only the Belgians (and the Luxembourgers) who still cling onto mandatory pay rises linked to consumer prices, and that’s becoming a thorny topic of national debate as household costs skyrocket across Europe.

Across the EU, economists are closely monitoring whether surging food and energy prices will translate into big wage hikes and longer term inflation. For now, pay packets are generally holding steady despite the strain on households. The hope is that energy prices will sink back and Europe will avoid entrenched inflation.

Belgium, however, doesn’t have the luxury of sitting back and waiting to see how things pan out.

Under the country’s labyrinthine social security system, rising prices automatically lead to higher pay checks. If consumer prices rise to a certain level, Belgian civil servants, pensioners and the unemployed receive an automatic income rise of 2 percent. This bump happened twice last year and is expected to occur again in February, according to the latest forecasts. Perhaps most contentiously, there’s also an obligation on private employers to increase wages, although the exact timing and percentage varies from sector to sector.

Belgian business leaders and employers’ groups are calling for an exemption this year, fearing that the scale of the required pay rises will heap extra costs on them as they try to recover from the coronavirus pandemic and will sap their effectiveness as exporters.

Politicians, however, are either keeping their heads down over the toxicity of the debate or insisting flat out that there is no prospect of changing the rules.

Belgian Prime Minister Alexander De Croo, a Flemish liberal, is one of those trying to steer well clear of the fight. “This is a very turbulent moment, with energy prices going up and down and supply chain problems,” De Croo said last week, adding that discussions on an exemption or change to the automatic pay rises could be held “at a later stage, if there’s a majority in favor.”

That’s an attitude that infuriates Pieter Timmermans, head of the federation of Belgian business. “The current government is too afraid to touch this subject,” he said. “At this point, everyone is in denial. But my prediction is we will run headfirst into the wall.”

“This is extra dangerous for Belgium, as we are an export economy. Our wealth depends on our ability to export. If our products become more expensive than those of neighboring countries, customers go elsewhere,” he added.

Belgium is having a tough ride with inflation. In December, it hit 5.7 percent compared with a year earlier on the back of steep hikes in energy prices. That’s the highest since the financial crisis in 2008 and outstrips the average inflation in the eurozone. Almost one million people in a country of 11.6 million are struggling to pay their energy bills and manufacturers are warning of the need to idle facilities because of the gas prices. Unemployment ran at 6.6 percent in the third quarter of 2021, holding almost exactly steady with a year earlier.

Changing the system — or skipping one pay rise because of the exceptional inflation as the umbrella organization of Flemish businesses wants — means entering a political minefield. It is viewed as a sacred cow to maintain social stability. Most Belgian voters, who are confronted with the rising energy and consumer prices, take the system as much for granted as the unions do.

According to David Vanbellinghen, spokesperson for Flemish trade union ACV, questioning the indexation system is like “looking at the thermometer, while forgetting about the fever.” 

“The real problem are the rising prices. A number of reports, including from the European Commission, say there is not enough competition in the services sector and that Belgium needs to act on energy prices. Ignoring this and tackling the indexation makes no sense,” he said.

On top of that, the current Belgian government is a delicate coalition of seven parties, ranging from the left to the right.

Paul Magnette, the party president of the French-speaking Socialists, made his negotiation position clear by tweeting an unambiguous “NON” in capital letters. But even his counterpart from the French-speaking liberals Georges-Louis Bouchez is defending the current automatic system.

Spending power

Together with Luxembourg, Belgium is the only EU country that mandates an automatic adjustment for all wages. Other European countries — including Denmark, the Netherlands, France and Italy — moved away from this scheme after inflation exploded in the 1970s and only slowly came down in the 1980s.

But advocates for the Belgian system argue that employees should be immediately compensated for higher prices, which sustains consumption levels.

“The wage indexation is a strong buffer to secure our purchasing power, which is important for people and for the economy,” said Vanbellinghen from the ACV.

Johan Van Gompel, senior economist at the Belgian bank KBC, agrees that the scheme “ensures social peace” because “households maintain their purchasing power” amid inflation.

But the downside, he notes, “is it threatens to undermine companies’ competitiveness, especially as Belgian inflation numbers tend to be higher than in other countries.”

Even regardless of inflation, wages were already on the rise because of a tight market for the labour required in the Belgian economy. About 65 percent of companies in the northern region of Flanders don’t have enough candidates for job vacancies, according to a survey of the National Bank of Belgium. Their quest for the right employees is already leading to an upward pressure on wages, with inflation now piling in on top of that.  

To be sure, there’s a buffer in place to make sure wages don’t skyrocket in comparison to other countries. There is a cap that prevents Belgian pay hikes moving disproportionately high in relation to predicted wages in neighboring France, the Netherlands and Germany. But this mechanism is meant to account for any potential increases above the automatic wage rises due to inflation, which is taken for granted.

“Because the system is automatic, it looks like Santa Claus is coming in with a bag of extra money,” Timmermans said. “But companies can only spend what they have earned first. Don’t forget that some companies have been out of business for months because of the pandemic.”

The bigger risk, as many economists see it, is that if businesses pass the costs of higher wages through their prices, it leads to more inflation and even higher wage demands, risking a spiral.

Other EU countries roughly compensate for inflation in their wages as well. But this adjustment usually happens during negotiations between unions and employers, which take more time, and often happen when the economic tide is turning.

“There is often a delay of a few years there,” said Peter Vanden Houte, chief economist at ING Belgium. “In the meantime, Belgium builds a competitive disadvantage.”

Simon Van Dorpe contributed reporting.

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