Jean-Claude Trichet
AP
ECB President Jean-Claude Trichet.
updated 7/9/2008 9:18:15 AM ET 2008-07-09T13:18:15

European Central Bank President Jean-Claude Trichet warned Wednesday that euro nations are already seeing the first signs of an inflation price spiral, calling on governments to take care not to grant wage hikes that could fuel further price rises.

The ECB’s governing council “is strongly concerned that price and wage-setting behavior could add to inflationary pressures,” Trichet told the European Parliament. “First signs are already emerging in some regions of the euro area.”

He said current inflation levels were “worrying” and warned they were set to stay high before cooling gradually next year.

He said indexation schemes in some EU nations which tie wages automatically to price rises were of “particular concern and should be avoided.”

Yearly inflation in the 15 countries that share the euro spiked to an estimated 4 percent in June, the fastest prices have accelerated in the 16 years of keeping records.

That prompted the ECB to hike borrowing costs last week for the first time in a year — to 4.25 percent from 4 percent — despite warnings from French President Nicolas Sarkozy and other politicians who fear it will stifle investment and worsen Europe’s economic slowdown.

Meanwhile, the EU statistics agency Eurostat lowered its estimate of economic growth in the 15 nations that share the euro to 2.1 percent for the first three months of 2008 from a year ago. Its earlier estimate was 2.2 percent.

Annual growth figures for France, the region’s second-largest economy, came in lower than originally expected — at 2 percent instead of 2.2 percent.

The euro economy expanded only slightly more slowly than in the fourth quarter of last year when it grew 2.2 percent.

But sliding business and consumer confidence figures and high inflation in the second quarter are likely to see growth cool considerably.

In his remarks in Strasbourg, Trichet expressed concern that some euro-zone governments adding to the risk of economic instability by failing to sticking to commitments to keep budget deficits low.

He defended the decision to raise rates and his calls for wage restraint. He said containing inflation was essential for a long-term economic recovery.

“Price stability paves the way for sustainable growth and job creation,” he told the assembly. “The most vulnerable and poorest of our fellow citizens are those that would suffer most” from persistent inflation, he insisted. Many EU lawmakers defended the bank and praised Trichet for resisting government pressure from governments.

“The European Central Bank stands as a tower as the waves crash all around,” said German Christian Democrat Christoph Konrad.

However, some on the left called for a change in policy to promote growth and help families struggling to cope with the fast rising cost of living. French Socialist Benoit Hamon said the exchange rate hike was “just making things worse.”

Trichet was backed by Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of eurogroup governments. He warned that failing to fight inflation could lead to a repeat of the long recession that followed the oil crisis of the early 1970s.

“There seems to be a wind of nostalgia for the seventies and eighties in this parliament,” Juncker said. “We can’t revert to the seventies and eighties (when) we allowed inflation to gallop ... the result of which was mass unemployment.”

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