On March 23, 1983, at 8 p.m., François Mitterrand appeared on cathode ray tubes across France for a speech that would go down in history. After painting a rather bleak picture of the country’s economic situation, the head of state declared: “It is time, high time, to stop the infernal machine.” The evil the president was talking about was the galloping inflation that had been squeezing the purchasing power of the French for several months now. Two years after his election, the socialist leader had to resolve to take a turn that he had not foreseen in his program: that of austerity. The economy was still suffering from the consequences of the 1973 oil shock, the franc had been devalued three times, unemployment continued to rise… All the signals were red.
François Mitterrand then announced that he had instructed the Prime Minister, Pierre Mauroy, to implement a series of measures to achieve a certain number of objectives such as “bringing inflation back to a level comparable to that of our competitors”, “restoring the balance of our foreign trade in two years” or “respecting the financial balances of Social Security and containing the State budget within its current limits”. The tenant of Matignon had in reality already begun a first turn of the screw, a few months earlier, by signing a circular which would gradually end, from 1983, the indexation of salaries on prices, in place since 1952.
A strategy that paid off in the long term. In 1986, inflation fell back below the 3% mark, after flirting with 14% five years earlier. This mechanism, subsequently abandoned by most European countries – with the exception of Belgium, Cyprus, Malta and Luxembourg – is now back in the news thanks to the victory of the New Popular Front in the early legislative elections. In its programme, the alliance of left-wing parties wants to index salaries again, as part of a “major law for purchasing power”.
The practical case of Belgium
During the austerity shift in the early 1980s, this mechanism was abandoned because it caused a price-wage loop, in other words a macroeconomic phenomenon where price and wage increases are self-sustaining. “This mechanism has really harmed us a lot, it has caused major damage to the real economy,” recalls Agnès Bénassy-Quéré, Deputy Governor of the Banque de France.
Those who advocate its return often cite the case of Belgium, which still applies an indexation of wages to inflation. Except for social benefits and public sector wages, it is not based on a law, but on collective agreements. “This system has only survived until today because there is a counterpart: the law on wage moderation which stipulates that our wages must increase at the same rate as those of our main competitors, namely Germany, France and the Netherlands. When they tend to increase too sharply, they are automatically blocked,” explains Belgian economist Philippe Defeyt.
In the flat country, indexation remains very popular, even if it is contested by businesses. However, despite its maintenance, it has not had the expected effects. “It has not managed to preserve purchasing power. People have a bad idea of inflation, based on what they buy regularly, but there can be biases in the measurement. When you index, you do it on the consumption of the average Belgian. However, this does not match the profile of everyone”, underlines Etienne de Callataÿ, professor of economics at the University of Namur. Added to this is a loss of competitiveness in periods of inflation linked to a faster adjustment of salaries than elsewhere in Europe. Finally, Belgium is not immune to the spectre of the price-wage loop. “We are faced with more marked underlying inflation”, confirms Etienne de Callatay.
The real problem is the compression of low wages
Would the situation really be different in France? The New Popular Front has not yet mentioned a safeguard similar to that found across the Quiévrain. For economist Christine Sinapi, “indexing wages to prices would amount to adding fuel to the fire. On the economic level, we know overall that it is ineffective, and even that it fuels the inflation phenomenon”. In any case, the economic context does not call for any urgency. In June, inflation continued to slow: it stood at 2.2% over one year, compared to 6.2% in October 2022. “Six months ago, we were wondering how to support the drop in purchasing power. Today, inflation is under control, it is not at all a priority to tackle this issue”, adds the expert.
Jonathan Marie, a lecturer in economics at the Sorbonne Paris Nord University, on the other hand, defends this measure. He believes that it would “prevent the population from becoming subject to the minimum wage”. Today, only the minimum wage is indexed to inflation, which has caused low wages to catch up since 2022. Furthermore, continues Jonathan Marie, if indexation were once again adopted by the countries of the eurozone, it would give more latitude to the European Central Bank, which would no longer have the primary mission of stabilizing prices and could focus on the primary objective of the ecological transition. But should all employees be put in the same basket? “Indexing the salaries of executives would seem a little strange”, judges Agnès Bénassy-Quéré.
In reality, through this measure, the New Popular Front avoids talking about the thorny issue: the downward compression of wages. Mathieu Plane, deputy director of the OFCE’s Analysis and Forecasts department, is campaigning for the implementation of a “partial, or even progressive, indexation” mechanism. “The challenge is to maintain the purchasing power of the poorest without triggering a price-wage loop. We need to find the right compromise on this,” says the economist. A compromise that seems essential to Jézabel Couppey-Soubeyran, lecturer at the University of Paris 1 Panthéon Sorbonne: “You only need to be a little above the minimum wage today to suffer enormously from the current system. There is a level to be defined to determine which wages would be affected by partial indexation.” An issue that the NFP does not seem to have taken into account.
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