Hi Peter, unprecedented inflation figures, which you, as an old hand in the field, remember from the seventies. What were the causes then?
‘That was largely due to the so-called wage explosion. From 1964 the unions demanded much higher wages, especially in the industrial sector, then still the largest employer in the Netherlands. The unions could paralyze entire industries with strikes. In 1964, a wage increase of no less than 15 percent followed.
‘So what did the employers, who had to pay for this, do? They raised the prices of their products. After which the workers demanded higher wages again because their purchasing power eroded. Thus arose the well-known wage-price spiral. This was compounded by an oil crisis when oil-producing countries in the Middle East first declared a boycott and then raised prices many times over.’
Why was this problematic?
‘Elsewhere in the world, including in Japan, companies emerged that paid much less wages. Due to all the wage increases, many Dutch companies were unable to compete and many went bankrupt. The textile, shoe and shipbuilding industries were wiped out. This led to enormous unemployment in the Netherlands.
‘Because civil servants’ salaries and benefits were linked to wages, the government had to spend a lot of money. Large budget deficits arose, the government had to borrow more and the interest on government bonds rose. In the early 1980s, the interest rate was even almost 13 percent. In comparison, this is currently zero. Anyone who bought a house paid more than 10 percent interest on the mortgage.
‘Finally, trade unions and employers agreed in 1982 that wages would not rise so quickly anymore: the Wassenaar Agreement. At the same time, the cabinet made drastic cuts to equalize income and expenditure, making the Netherlands more creditworthy and able to borrow more cheaply. In this way we have slowly but surely got out of the spiral. He never returned after that.’
Can such a wage-price spiral now arise again?
‘At the moment you don’t see that employees are demanding massively higher wages. Trade unions also have less clout than in the past, because their membership has decreased so much. If workers want their wages to keep up with inflation, they need to join a union: it’s hard to call strikes if people don’t join. So there is no question of a wage-price spiral yet.’
To what extent is current inflation comparable to that of the past?
‘In a sense we are now experiencing the opposite. In the 1970s, people spoke of stagflation: inflation rose while growth stagnated and there was a lot of unemployment. The cause is overheating of the economy: there is actually a lot of money and there is a shortage on the labor market.
This is largely due to the unexpectedly rapid economic recovery after the corona crisis. Price increases are still expected to be temporary and inflation will last much shorter than in the 1970s and 1980s. The price increases for oil and gas also seem less structural.
“Besides, this is a completely different era. The economy is much more global. What happens in America affects us directly. Businesses and capital can go anywhere. The euro makes the Dutch economy much more closely linked to the rest of Europe. All this means that the Netherlands has less control over its own economy.’
Is it better for the economy if wages do not increase with inflation, to avoid the scenario from the 1970s?
‘Not by definition. Inflation is now causing the purchasing power of the Dutch to decrease: life is becoming more expensive. If there are wage increases, especially for the younger generations, there will also be more spending and that actually stimulates the economy.
‘If wages do not keep pace, essential sectors that have been struggling with personnel shortages for some time, for example in healthcare or education, will only become less attractive to work in. If at some point we have to queue for the hospital, or if our children can no longer go to school, we will have to give those people more money.’