The International Monetary Fund (IMF) has issued a stern warning about the rapid escalation of wages in central and eastern Europe, cautioning that this upward trend threatens to erode the region’s competitive advantage. While income levels have surged at double-digit rates in many countries across this region in recent years, the IMF contends that productivity has remained largely stagnant.

Alfred Kammer, who leads the European department of the IMF, articulated concerns over this development, suggesting that it „could create a competitiveness problem” for central and eastern Europe. These countries have traditionally enjoyed an economic boost from western European companies relocating their production activities to this region due to its cost-effective labour force. However, Kammer emphasised that the wage increases witnessed in recent years are markedly different from the past, stating, „Our warning is don’t get complacent and think this is due to a productivity increase. It isn’t.”

Indeed, the second quarter saw wages surge at an alarming rate in central and eastern Europe, ranging from 16.9 percent in Hungary to 9.9 percent in Slovakia, placing the region at the top of the EU’s pay raise charts and surpassing the bloc’s 4.5 percent average. Nevertheless, inflation in many parts of this region has also far exceeded the EU average.

According to the IMF’s outlook, wages are anticipated to continue growing, albeit at a slower pace. Projections indicate an average growth rate of 11 percent for 2023, with a deceleration to 7 percent in the following year and 6 percent by 2025.

This stance from the IMF is expected to clash with the policies of eastern European governments that have long championed higher wages as a significant benefit of EU membership. In the past, wage hikes were coupled with improvements in productivity, bolstering the competitiveness of the region’s workforce and attracting substantial foreign direct investments, exemplified by the establishment of new factories by western European automakers.

However, some countries, such as Romania and Poland, have seen millions of workers migrate to western Europe, resulting in labour market tightness and providing a fertile ground for those who remain to demand substantial pay increases.

To address these challenges, the IMF has recommended that governments in the region reduce budget deficits and implement measures to facilitate worker mobility, increase labour force participation, and enhance productivity.

Contrary to expectations of slowing down this trend, the incoming coalition government in Poland, led by Donald Tusk, is anticipated to further raise wages in response to pressure from trade unions, which contend that high inflation has disproportionately affected their members. This move has garnered significant public support, with thousands of public workers staging demonstrations in Warsaw to demand such salary increases. Tusk’s administration has committed to increasing public sector wages across the board by 20 percent.

The IMF’s assessment also underscores a broader concern regarding inflation. While a „soft landing” is expected for most of the European economy, with inflation predicted to gradually decline and modest growth prospects, Kammer cautioned central banks against prematurely lowering interest rates, which could potentially rekindle inflation and necessitate a more painful series of rate hikes to mitigate its effects.

In conclusion, the IMF’s warning serves as a timely reminder of the complex interplay between rising wages and productivity in central and eastern Europe. As the region grapples with the implications of surging incomes, policymakers face the critical task of finding a delicate balance to ensure economic sustainability and competitiveness on the global stage.