The very important role of euro-zone companies’ weak pricing power

Euro-zone companies have weak pricing power (they cannot easily pass increases in their costs through to their prices), probably because of the intensity of competition (internal and external). This situation of weak pricing power has important consequences: When unemployment becomes low, wages accelerate, but this acceleration in wages does not give rise to inflation, and it leads to a decline in corporate profitability; Even when unemployment becomes low, interest rates remain low due to the low level of inflation. If companies in the euro zone could now pass increases in their costs through to their prices, core inflation would be 2% and the ECB would have to normalise its interest rates.