Filenews 8 February 2026 - by Theano Thiopoulou
How much inflation or wage increases can affect the competitiveness of the economy is an issue that has often been a field of political controversy. The European Commission's report entitled "After the inflation shock. Stocktaking of price and cost competitiveness in the EU", published on 30 January, comes to answer this concern, pointing out the significant heterogeneity in inflation between EU countries.
This, as indicated, has led to significant real appreciation and reduced price competitiveness, especially in the countries of Central and Eastern Europe.
This was due to import costs, profits and wages, causing large divergences in price competitiveness within the EU, report authors Milan Výškrabka and Adrian Bodea.
Let's start with the final conclusion, before mentioning the general elements of the report. "In Ireland, Cyprus and Malta, productivity growth has outpaced real wage growth," it concluded. The authors of the report indicate that these countries have shown very strong economic growth and productivity growth, which partly explains the low rise in domestic unit labour costs.
It should be clarified that labour productivity is of particular importance for the economy, since it is directly linked to sustainable wage growth. In order for an economy to remain competitive, the increase in nominal wages must go hand in hand with the improvement of productivity, so that unit labour costs do not increase and inflation is fed back, creating a vicious circle of cost and price increases.
What happened elsewhere
The report's authors report that real wage growth outpaced labour productivity gains in many of the most affected countries in 2020-2024.
This is especially true in Lithuania and Croatia, where nominal wages, deflated, with the GDP deflator (it helps us find the part of nominal GDP growth, which is due to the increase in prices rather than the products produced) reveal strong wage growth, which exceeded the increase in labour productivity. In Bulgaria and Romania, subdued HICP (Harmonised Index of Consumers) growth suggests real wage growth significantly higher than productivity growth. However, if the GDP deflator is taken into account, real wage growth has been more in line with productivity in these two countries.
Developments in Latvia have moved in the opposite direction. Real wage growth far outpaced productivity growth. On the other hand, Slovakia and Czechia, which are among the countries with high inflation, show a negative gap between real wage growth and productivity. In Czechia, this gap results from a decrease in real wages rather than an increase in productivity, while the opposite is true for Slovakia.
Inflation and competitiveness
The aim of the report is to assess developments in price and cost competitiveness since the beginning of the pandemic, as high inflation cannot be directly correlated with a loss of competitiveness. Despite the common factors that cause inflationary shocks, countries have generally experienced very different experiences.
As stated in the report, uneven developments in inflation across the EU have caused many heterogeneous changes in price competitiveness across Member States. Some countries have had to deal with a significant real appreciation, while others have seen their price levels fall relative to those of their trading partners. However, high inflation does not necessarily imply a loss of competitiveness, as some other factors, such as the initial competitiveness position or developments in productivity, must be taken into account before drawing any conclusions, the report explains. Although inflation differentials across the EU have narrowed significantly, some countries continue to experience elevated inflation, which accelerated again during 2025. As a result, the report points out, divergent developments in price and cost competitiveness are expected to continue, at least in the short term.
In the analysis of the report, it is noted that the countries of Central and Eastern Europe showed a particularly sharp increase in inflation, while other Member States, such as France, Greece, Italy and Finland, showed rather moderate inflation rates over the period 2020-2024. Import prices, in particular energy product prices, increased significantly in 2021 and 2022, but declined somewhat thereafter. Domestic drivers of inflation – earnings and wages – also increased significantly, with the former reacting very quickly, while the latter became quantitatively the most important contributor to inflation in some Member States until 2024. As a result, price levels increased significantly but unevenly across countries. Specifically, measured by the GDP deflator, a measure of headline inflation across the economy, prices rose by about 15% in France, while Hungary experienced an increase of almost 60% over the period 2020-2024.
Moderate wage increases in Cyprus
Wage increases are moderate, the Central Bank of Cyprus points out and, combined with the positive course of labour productivity, ensure the competitiveness of the Cypriot economy.
In its December 2025 Economic Bulletin, the Central Bank points out that continued resilience in the labour market is not fuelling upward pressures on wages, given the relatively modest wage increases that have been agreed after the inflationary episodes in previous years.
In the first nine months of 2025, nominal expenditure per employee increased by 4% compared to 3.9% in the corresponding period of 2024. In the private sector there was an increase of 3.9% and in the public sector by 3.8%. Growth in the private sector was broad-based, driven mainly by the service sectors, such as information and communication, trade, transport, hotels and restaurants, and professional and financial services.
In real terms, expenditure per employee increased by 3.3% compared to 1.9% in 2024. The acceleration in real expenditure is attributed to lower inflationary pressures, in line with the steady increase in nominal expenditure per employee. The unit labour cost index increased by 2% in the first nine months of 2025, stable compared to the same period last year. Despite recent annual increases, the unit labour cost index remains at significantly lower levels than the euro area average, which supports the competitiveness of the Cypriot economy, it indicates.
