The inflation gap between Belgium and the three main neighbouring countries and likely repercussions on competitiveness

In a monetary union, divergences of inflation rates between the participating countries have direct repercussions on their price and cost competitiveness. Bearing this in mind, the article examines the implications of inflation differentials within the euro area and shows that participation in the monetary union can only succeed if the Member States pay sufficient attention to changes in their competitive position. The article then goes on to discuss the institutional framework for monitoring competitiveness in Belgium and raises the question of whether it is still advisable, as is currently the case, to focus primarily on the three main neighbouring countries rather than on the euro area as a whole. Since the answer to this question is in the affirmative, the last part analyses the inflation gap with these same countries. Although broadly in line with the inflation rate in the euro area, inflation in Belgium has recorded a cumulative positive differential vis-à-vis the three main neighbouring countries of around 5 percentage points since 1996. It is largely attributable to faster growth of unit labour costs, while the contribution of energy price developments has on the whole been neutral over this period. However, in 2008 and again in 2010, energy products evidently contributed positively to the inflation differential, as did foodstuffs. In this context, particular vigilance is called for on two fronts. On the one hand, attention needs to be paid to the extent of the first-round effects that commodity price changes can have on inflation (especially food products, natural gas and electricity). The Price Observatory, the Commission for Electricity and Gas Regulation (CREG) and the Competition Council have an important role to play here. On the other hand, it is important for the social partners to internalise all possible effects of wage indexation and strive to reach agreement on nominal pay rises that will preserve Belgium’s competitive position in accordance with the 1996 Law on the promotion of employment and the preventive safeguarding of competitiveness. In the longer term, a reduction in the energy intensity of Belgium’s consumption profile would also help to keep price and cost developments under control.