Eurozone negotiated wage growth picks up in Q2

Negotiated wages in the Euro Area rose by 3.95% year-on-year in the second quarter of 2025, accelerating from an upwardly revised 2.46% in the previous quarter and marking the fastest pace in over a year.

The pickup highlights persistent wage pressures that complicate the European Central Bank’s policy path, even as headline inflation has moved closer to target. ECB officials have repeatedly stressed that achieving a sustainable return to 2% inflation requires slower pay gains, particularly in the services sector, where inflation remains stubbornly high at around 3%.

National-level data show uneven patterns. The Bundesbank reported a strong surge in German wage settlements in the quarter, largely reflecting catch-up agreements from prior inflation shocks, though it expects moderation later this year as inflation continues to ease and economic activity stays weak. In Southern Europe, wage growth has been somewhat more contained, but collective bargaining rounds in Spain and Italy point to elevated pay demands, adding to the bloc-wide wage drift.

The ECB’s internal pay tracker, which combines collective agreements and high-frequency wage indicators, points to a softer trend into 2026, providing some reassurance that the recent spike may be temporary. Still, the Q2 jump underscores why policymakers remain cautious about signaling further rate cuts too soon. Market pricing currently suggests the ECB will hold its deposit rate at 2% in September, continuing a pause after a year of reductions, with consensus leaning toward no change for the remainder of 2025. That said, some Governing Council members argue that leaving the door open for additional cuts is prudent, particularly if growth risks deepen or geopolitical uncertainties weigh further on activity.

Beyond monetary policy, the latest wage developments could also influence fiscal debates. Rising public-sector pay settlements in several member states may limit governments’ fiscal flexibility, especially in countries where deficit reduction targets remain under strain. For the ECB, this means balancing risks of entrenched wage-price persistence with the need to support a still-fragile recovery across the region.