Tuesday, April 29, 2008

Inflation squeeze on Europe's middle class

An interesting article from IHT.com regarding inflationary effects on Europe's middle class.

Tuesday, April 29, 2008

LES ULIS, France: When the local bakery increased the price of a baguette for the third time in six months last year, Anne-Laure Renard and Guy Talpot invested in a bread-baking machine. When gasoline became their single biggest monthly expense in January, they decided to sell one of their two cars.

Now, as everything from baby milk to chocolate desserts drives up their living costs, Renard, a teacher, and Talpot, a mailman, are planning their most radical lifestyle change yet: They are getting married to reduce their tax bill.

Across Europe, people in the middle layer of the labor force - from office workers, civil servants and skilled laborers to low-level managers - are coping with a growing sense that they are being pushed to the margins like never before, as a combination of rising costs and stagnant wages erodes their purchasing power.

Prices for basic goods from gas to milk are rising sharply, outpacing pay rises linked to official rates of inflation. Families that once maintained pleasant lifestyles afforded by two incomes find the rise in costs - which have accelerated worldwide in the past year - has pushed them to the tipping point. Many Europeans are pinching pennies on food and everyday items, while cutting back on a range of extras, from movie tickets to vacations abroad.

More worrisome, a generation of European workers is grappling with a rising sense of injustice as they face the reality that they may be becoming worse, not better, off than their parents. Even holding classic middle-class professions with a university degree has become less of a guarantee against economic hardship. That, in turn, is igniting concerns of an even more uncertain future for their own children.

To be sure, the middle class in Europe is still more prosperous than the disturbingly large group of citizens who are at risk of poverty. According to the European Commission, 16 percent of the population of Europe falls into this category. Policy makers are concerned that could worsen as the economy feels the sting of a U.S. slowdown, while inflation spirals around the globe.

Yet these same forces are also widening the pool of middle-class Europeans who see themselves on the edge of impoverishment. That concern boiled over to anger last week in Britain, when teachers closed the country's schools for the first time in two decades to protest pay deals that are not keeping up with the soaring cost of living. Especially for those who were not lifted by the latest financial market bubble before it started to collapse last summer, there is fear that proposed pay rises of about 2.5 percent are too meager to absorb food and oil costs that have surged in Britain by about 7 percent and 20 percent, respectively, from a year ago.

Their rallying cry is the latest to echo across Europe. German workers in several industries last month waged a series of strikes to demand a greater piece of the economic pie after years of being asked to make do with stagnant wages.

In France, a range of professions from teachers to factory workers have taken to the streets to urge politicians to counter a decline in purchasing power. This month, thousands of European workers protested on the same theme in Ljubljana, the capital of Slovenia, which currently holds the EU's rotating presidency.

Bowing to public concern, some European governments are promising relief, though their powers to curb inflation or raise pay are limited. In France, where the erosion of purchasing power has overtaken unemployment as the No. 1 public concern, the administration of President Nicolas Sarkozy is, among other things, looking into alleged "abuses" of pricing by food merchants. Neighboring Germany is mulling lower social insurance taxes to offset higher prices.

Capturing the squeeze felt by the European middle class in statistics and across national boundaries is tricky because this grouping has no universal definition. National authorities calculate purchasing power differently, making cross-border comparisons difficult.

Much of the story of declining purchasing power can be traced to policy decisions and economic developments that have taken place within the last decade, when the forces of globalization began to reshape the European and global landscapes.

Governments and employers, especially in industrial sectors, have kept pay rises modest, a trend that was manageable as long as inflation did not accelerate in a surprisingly sharp manner. In addition, more of each country's income has gone to the wealthiest individuals, underpinning the acute feelings of inequality across the broad middle class.

In Germany, the largest European economy, purchasing power had already been declining since 2000, when employers were able to wrest wage concessions or simply shift jobs away as Eastern Europe and China emerged as centers of low-cost labor. Inflation-adjusted incomes rose between 1 percent and 2 percent in the late 1990s, but in 2006 they rose only 0.5 percent and then declined by the same amount last year.

In France, the introduction of a shortened, 35-hour workweek in 2000 has kept average annual pay increases small. Spain, which generated thousands of new jobs for Spaniards and migrant workers by pumping up the housing market, has seen joblessness jump since the bubble burst, while wages are eaten by an inflation rate that is more than double the 2 percent level that most economists consider stable.

Stagnant pay and soaring food and energy prices have curbed consumption in Italy more than any of the other 14 countries that share the euro, sharpening fears that the country cannot escape decline. Since 1999, consumer prices in the EU's 27 member states have risen 22.5 percent, and are up 18.8 percent among the 15 countries that use the euro.

But some pushback is emerging, as the demonstrations in Britain suggest.

Employers and economists in Germany drummed into public discourse the point that labor costs had spun out of control, costing manufacturers much of their market share. But with purchasing power eroding, unions are trying to reverse the trend, drawing a tougher line in wage talks - with some success.

(Carter Dougherty reported from Frankfurt. Victoria Burnett contributed reporting from Madrid and Elisabetta Povoledo from Rome.)

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