Reuters published a story on a meeting between European central bankers this week, held somewhere in Finland in a remote village above the arctic circle (suitably far removed from democratic scrutiny, but that is a point for later.)
In it, two dozen slides were supposedly shown detailing how large corporate profits made up the bulk of inflation over the past year, a departure from the official story until now of a mismatch between demand and supply—or as classical monetary theory would have it: “too much money chasing too few goods.”
The slides have not been made public. But it drove home the “cold hard fact” that corporate profits, not wages or mom-and-pop buying too much stuff, were pushing up general inflation.
Over the past nine months, the European Central Bank has engaged in the steepest interest rate hikes in the euro’s history to fix the mismatch between demand and supply, drive down demand and prevent a so-called “wage-price” spiral from taking hold.
But it is unclear — and has never been explained — whether (and how) current monetary policy addresses corporate profiteering.
Record profits, real wage losses
To get a sense of the scale: margins of US companies in 2022 surpassed a level not seen since 1947. Europe lacks official corporate profit data, but company accounts paint a similar picture.
Oil and gas giants like Shell and commodity traders like Glencore showed the strongest profit growth, setting historical records. But multinational retailers like Ahold Delhaize have also been able to offset higher costs and increase profits to 13.5 percent. Based on a survey of 106 companies, Eurozone companies boosted profit margins to an average of 10.7 percent in 2022, up 25 percent over 2019.
In a study published on Tuesday, political economist Isabella Weber describes the post-pandemic price hikes as a form of corporate herd behaviour. Detailed on a granular firm-by-firm level, she shows how price hikes by “price setters” in the commodity and oil and gas sectors “provide an impulse for further price hikes downstream.”
“Companies resist lowering prices to prevent a price war, and they raise prices expecting others to do the same,” she wrote. If not curbed, so-called “seller inflation” can lead to real wage declines.
Indeed, the EU has seen real wages decline by 2.9 percent in 2022. Real wages in Germany fell by 3.1 percent last year and fell for the third year in a row.
Yet as Reuters reported, Lagarde, in her most recent press conference, mentioned wages 14 times, while profits as a potential driver of inflation were not mentioned at all.
How decisions are made
It raises the question of how monetary decisions are made. It has been clear from the start corporate profits, not wages, drove inflation.
In May last year, ECB chief economist Isabel Schnabel said: “many firms could expand their profits, often implying that consumers, rather than shareholders, have borne the brunt of the inflationary shock.”
Her claim was later borne out by EU statistics body Eurostat figures, which showed corporate price hikes drove inflation, not rising wages — a view later adopted by the EU Commission.
So why did the ECB increase interest rates? MEPs have often asked it during their monetary discussions with Lagarde in parliament.
Just recently, Greens MEP Rasmus Andresen navigated a potentially ‘historic’ resolution through the parliament’s economic and monetary affairs committee, calling on the bank to better explain how its policies affect society and the economy as a whole.
The bank, Andresen said, has “ignored” explaining how its policies affect the economic objectives of governments, such as preventing climate change or policies aimed at better employment and alleviating inequality, and he welcomed “greater caution with regard to aggressive rate hikes.”
At the resolution’s core is the bank’s relation to democracy: every monetary choice inevitably benefits some at the expense of others. This makes monetary policy political. Yet due to fierce central bank independence, there is no political debate.
This is exemplified in practice: The ECB is managed by a governing council of six executive board members and 20 national central bank chiefs. But the often deep disagreements are almost never disclosed. Moreover, each member has veto power, resulting in all decisions being made unanimously or not at all.
When hawks like Dutch central banker Klaas Knot keep demanding large interest rates hikes, the question that is rarely asked is; how much more can the European economy actually take?
“The effects of monetary policy on the real economy is the most underestimated risk for the eurozone economy right now,” Carsten Brzeski, chief economist of ING Germany, previously told EUobserver.
You could assume such questions are hotly debated at the bi-monthly All Governors Meeting in Basel, Switzerland, but you would never find out what was said. Here 63 of the most powerful central bankers–including Jerome Powell, chair of the US Fed—gather to discuss “themes of special relevance to their economies.”
It is probably the world’s least known, most underreported, top-level meeting. Its attendees discuss matters of global economic significance, think out loud and align policies, mostly outside of the view of democratic scrutiny.
A public forum
Is it wrong monetary decisions are made in monastical seclusion from democratic institutions? That is a matter for democracy to decide. But the ‘cold hard fact’ is: there is no public debate about central bank decision-making and whether it is fit for purpose.
Precisely for this reason, Andresen’s resolution could become a historical marker in what until now has been a largely abstract debate between technocrats.
For the first time in the union’s existence, there is a legally defined forum for elected officials to scrutinise the effects of monetary decisions on the economy as a whole and, by extension: you and me.