Energy-driven inflation set to erase real pay gains across Europe, except in Germany

Workers in Italy, Spain, France and the United Kingdom are on course to lose purchasing power as inflation outruns pay, while Germany moves in the opposite direction, according to projections from the OECD's Employment Outlook 2026 reported by Euronews. The forecasts show real wages, which adjust pay for inflation, falling in those four countries between the first quarter of 2026 and the first quarter of 2027 but rising in Germany.

Across the eurozone, the dip is expected to be shallow. Real wages are projected to slip 0.4% below their first-quarter level by mid-2026, return to that level by the first quarter of 2027 and end 2027 about 0.7% higher. The OECD's numbers rest on the assumption that disruption from the conflict in the Middle East is "sizeable but limited to a relatively short period of time."

Italy and Spain absorb the deepest losses

Italy faces the steepest fall. Its real wages are projected to sit 1.9% below the early-2026 level in the third quarter, 1.4% below in the first quarter of 2027 and still 0.6% short at the end of 2027. High energy costs are expected to erase Italy's recent real wage gains, and its recovery is likely to be limited, Euronews reported, citing OECD economist Alexandre Georgieff. Italian inflation reached 4.1% in September.

Spain shows a similar pattern. Real pay there is forecast to be 0.4% lower in the third quarter and 0.7% lower in the fourth, a gap expected to persist through 2027. Spanish inflation was about 5% in September. Both southern economies are therefore projected to remain below their early-2026 real wage levels at the end of next year.

In the U.K., real wages are seen falling 0.6% in the second quarter of 2026, 1.5% in the third and 1.6% in the fourth, the low point, before ending 2027 about 1% higher. British inflation was 3.1% in August. "The outlook for real pay growth in the U.K. remains challenging," said Charles Cotton of the CIPD, the professional body for human resources. France sits closer to the middle: a 0.5% decline in the second quarter gives way to a 0.1% gain by the end of 2027. Georgieff said French inflation "remains relatively low thanks to nuclear power"; it stood at 3.4% in September, below the eurozone's 3.8%.

Why Germany diverges

Germany is the outlier. Its real wages are projected to rise 0.1% in the second quarter of 2026, 0.5% by the end of the year, 1.1% by the second quarter of 2027 and 1.7% by the fourth quarter of 2027, even with inflation at 3.3% in September. Euronews tied the gains to a tight labor market, a debt-financed fiscal expansion and wage catch-up through collective agreements. The minimum wage rose 8.4% at the start of 2026 and is set to climb another 5% in 2027.

Enzo Weber, a professor at Germany's Institute for Employment Research (IAB), said nominal wages "started to catch up, supported by collective wage bargaining," adding that "Germany witnessed several stagnation years." The contrast with the south comes as Europe still feels the energy shock that drove record pump prices across the EU.

What it means: The OECD projections turn Europe's energy exposure into a household story. Countries that lean on imported fuel feel the Middle East conflict in their paychecks, while France's nuclear-heavy power mix and Germany's fiscal push and wage deals cushion workers there. That split complicates policy in a currency union where one interest rate must serve both a recovering Germany and a squeezed Italy and Spain. It also adds political strain in Rome, Madrid, Paris and London, where governments face voters whose real pay is shrinking. The bigger risk lies in the baseline itself: the forecasts assume a short disruption, so a longer conflict would push the recovery in real wages further out.