Is the Good Life Out of Reach?

If you believe the official statistics, these should be feel-good times in Western Europe. The economy is growing at its fastest pace since 2000, while inflation and interest rates remain low by historic standards and unemployment almost everywhere is falling. Try telling that to Marie Pereira. She sells Baccarat crystal in the fancy Bon Marché department store in Paris, and she’s feeling anything but well off at the moment. “Basic things like food shopping are twice or even three times as expensive as before,” she complains. “People have much less money at the moment, so they have to cut back. It’s as simple as that. Moneywise, we’re all in a tight spot.”

That lament is sung across Europe. Far from enjoying the economic recovery, millions of working people are feeling squeezed, and their disgruntlement is becoming the hottest social and political issue of the day. Asked to name their biggest worries in a Novatris/Harris poll last month, French, Germans and Italians all put “increased cost of living” at the top of the list, ahead of unemployment, security, pensions or immigration. French Prime Minister Dominique de Villepin recently called “purchasing power” the nation’s top priority, and the issue has become the central theme of the presidential election campaign, with candidates on both left and right making a range of expensive promises to boost income for the middle class and the less well-off alike. After several years of wage restraint, unions in Germany, the Netherlands and elsewhere are pushing for substantial hikes this year. Now that the economy is doing better again, Dutch workers “think it’s their time to get something back,” says Marco van Moort, spokesman for the biggest Dutch union, Bondgenoten FNV. Builders in the Netherlands recently negotiated themselves a 7% pay increase over 27 months, far above the inflation rate. The European Central Bank last week expressed concern that such wage hikes could stoke inflation.

To some extent, this public discontent is a worldwide phenomenon. Wages in all industrialized countries have been under pressure due to growing global competition and technological change. In Germany, for example, automotive workers over the past few years agreed to work longer and more flexible hours for no increase in pay to prevent their jobs moving to Slovakia and elsewhere. Such agreements have helped the German economy rebound, but they’ve stoked resentment, particularly since corporate profits, stock prices and the pay packets of top executives are soaring. The share of wages as a percentage of national income in industrialized countries has dropped to its lowest level in more than three decades while, conversely, the share of profits is at a record high. Laura D. Tyson, a former White House economist who teaches at the Haas Business School in Berkeley, California, worries that public feelings of injustice are fueling a growing backlash against globalization. “It’s a key vulnerability,” she says.

But in Continental Europe, an additional factor feeds the disgruntlement: the euro, which 13 European Union countries have now adopted as their official currency since it was first launched on Jan. 1, 2002. From Madrid to Maastricht, it has become conventional wisdom that the introduction of the single currency jacked up prices. At the entrance gate of Volkswagen’s main plant in Wolfsburg, Germany, Ulf Meinecke, 38, shoves his hands into his jacket pockets and says he can no longer afford annual vacations to Italy with his family. “We just go every other year,” he says. “Everything is getting more expensive, and the euro was the blow that broke our necks.”

That sort of talk gives heartburn to E.U. officials and statisticians across Europe because they say it’s largely unfounded. Indeed, since 2002, inflation has been rising faster in Britain, which kept its own currency, than in countries that switched to the euro. True, the cost of some everyday items has gone up, at times quite sharply. The German statistics office, for example, has calculated that, since 2000, the price of a man’s haircut has risen 7%, a breakfast roll is up 13% while tram tickets are 17% more costly. In France, a cup of coffee in a café has risen 45%, and a baguette is up 40%, according to the French statistics office. Yet these and other visible price increases were easily offset by the drop in prices of goods that people don’t buy every day, such as TVs, refrigerators, clothes or cars. Since inflation rates are averages, compiled from thousands of prices, the overall level barely moved. The questioning of official inflation statistics is “an issue that makes my liver scream,” says Enrico Giovannini, an Italian who works as chief statistician for the Organization for Economic Cooperation and Development in Paris, though he concedes that the introduction of the euro brought with it some “terrible problems of perception.” (Researchers are busy trying to figure out why — see sidebar.) Economists fear that that the credibility of official statistics could be undermined altogether, with potentially serious consequences. “An economy cannot function if half the people think that inflation is at 100% and the other half think that it’s at 2%,” frets Giovannini. “

Whatever the truth about inflation, the wage squeeze is real — and hard felt. In Spain, a study by the IESE business school last summer showed that household spending power has barely budged in a decade, even as the national economy has boomed. But it’s in Germany, Europe’s largest economy, where the pain is arguably felt the most — and where the backlash is now building.

The Berlin government is enacting a slew of programs to reduce government spending, including a plan to raise the legal retirement age by two years, to 67. The aim is to shore up the national pension system, which is under huge strain as people live longer and thus draw benefits for longer. But inside the entrance gate at VW, to the strains of an aging rock ‘n’ roller playing an electric guitar, hundreds of car workers in their blue and gray overalls staged a demonstration on Jan. 31 in protest. For many of them, the pension changes are just another example of workers footing the bill for the government’s economic reforms — and the nation’s rebound.

The Federal Statistics Office reported last month that German wages posted the smallest rise in 2006 since the office first began reporting on pan-German wages in 1995. Wages rose 1.2% last year, lower than the 1.7% rate of inflation. Hardest hit were government and municipal employees (a category that includes police, fire fighters and teachers), and workers in the building sector, whose hourly wages fell 0.8% and 0.2% respectively as a result of working longer hours for the same wage. Add to that a variety of price increases — in January, value-added tax rose to 19% from 16%, and health insurance premiums rose — and the combination stokes growing anger. “They say the economy is booming, but what good does that do us?,” asks Stephan Koch, 36. “It’s about time that we got something out of the upswing.”

Officials at Germany’s powerful IG Metall union, which dominates the automotive, machinery and steel industries, think the same way. The 2.3 million-strong union is going into this year’s wage talks fighting for a 6.5% wage hike — almost quadruple the inflation rate — and protests like the one at VW are part of a nationwide campaign to increase pressure on employers and politicians. “Shareholder profits and management salaries have been rising a lot faster than the wages of factory workers in this country. There are high expectations among the rank-and-file. I think we’re going to have a wage round with a lot of conflict,” says Hartmut Meine, the IG Metall official for VW. Employers say that would spell disaster for Germany. Martin Kannegiesser, head of the metal industry employers’ association Gesamtmetall, expects the pace of industry growth to slow this year. “We are in a phase that demands moderation,” he says. “Wage policies can not be allowed to drive our prices sky high on world markets, otherwise the economic recovery will come to an end.”

German popular sympathies, for the moment, lie with the union. According to a poll published by the ard public television network on Feb. 1, just 22% of Germans questioned said they felt they would personally benefit from the economic recovery, compared with 74% who said they wouldn’t. When asked about IG Metall’s wage demand, 44% said it was appropriate — and 5% even said it was too low.

Will such disaffection be enough to derail Europe’s budding economic recovery? It’s too early too tell; German wage negotiators have a history of talking tough but settling. Moreover, companies throughout Europe are flush with cash and can afford to be generous with one-time bonuses, even if they don’t agree to more permanent pay hikes. But it will take more than big wage settlements in Germany and elsewhere to make Marie Pereira happy at her Bon Marché counter. She’s full of grumbles: real estate prices have gone up so fast that, as a single person, “finding an affordable flat here is practically impossible.” Even the simple pleasures of life are now beyond reach. “When I started smoking 10 years ago, a packet of cigarettes cost 10 francs. Now it’s j5 (32 francs),” she says. “It almost makes me want to quit.” That, of course, would be one salutary effect of higher consumer prices. But it does nothing to persuade Pereira — or millions like her — that the economy is as strong as the experts say it is.