Malta defends wage adjustment mechanism

Malta is expected to retain its cost of living adjustment mechanism after Germany appears to be retracting from its position to abolish the system at EU level.

Malta is one of the last remaining EU member states with a wage indexation system linked to inflation rather than productivity. Known locally as COLA, the system has been in place for decades and is supported by trade unions. Employers’ organisations and the Central Bank governor have been calling for a revision, preferring to link wage increases directly to productivity levels.

Defending Malta’s position to retain the COLA system, Employment Minister Dolores Cristina told EU colleagues during a meeting of the Employment Council in Brussels Malta was adamant on retaining the wage indexation system because it “guarantees” industrial stability.

“We acknowledge increased productivity is a key element of sustainable development. Although we agree unit labour costs should be linked to increased productivity, this does not mean we should do away with our wage indexation mechanism,” she said.

The system in Malta was essential to ensure industrial stability because it established a mechanism for the management of salary increases while ensuring competitiveness, she insisted.

Malta, Belgium, Luxembourg and Cyprus still base their salary increases on inflation and Spain and Portugal have a similar system. Denmark, France, Italy and the Netherlands used to adopt the same mechanism but changed to a productivity related index. Germany ties salary increases entirely to productivity levels.

According to critics, wage indexation could fuel a sharper increase in consumer prices if, during a period of high inflation, companies seek to raise the prices of their products to cover their higher wage costs. On the other hand, supporters argue it is a fair system even though it does not always encourage productivity increases.

EU sources said that although Germany was originally insisting on reaching an agreement on the abolishment of the system, as part of a new Competitiveness Pact for the euro area, it had now relaxed its pressure on smaller member states in exchange for their support on other important aspects of the pact. These include higher retirement ages, interest rates for countries that receive bailouts and synchronised corporate tax rates.

EU leaders will be meeting in Brussels on Friday for the latest in a series of summits to discuss proposals by German Chancellor Angela Merkel and French President Nicolas Sarkozy for a Competitiveness Pact aimed to bring eurozone economic policies closer and hammer out a bailout mechanism to avoid future crises.

During the summit, Malta, together with Ireland, is also expected to defend its position against any attempts to introduce common corporate taxes at EU level.