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The New World Ordoliberalism Part 3: About That Raise You Wanted...

Along with last week’s news of Ger­many’s record trade sur­plus, the open­ing of an EU inves­ti­ga­tion into Ger­many’s grow­ing sur­plus­es, and Europe’s oth­er recent remark­able socioeco­nom­ic achieve­ments, Angela Merkel made an announce­ment on Fri­day regard­ing her par­ty’s plans for Ger­many’s eco­nom­ic poli­cies that might actu­al­ly be good news for Ger­many and the rest of Europe: She’s urg­ing her fel­low CDU mem­ber to com­pro­mise on an across-the-board 8.50 euro Ger­man min­i­mum wage over the CDU’s long-stand­ing posi­tion of no min­i­mum wages and instead agree­ments nego­ti­a­tions by eco­nom­ic sec­tors and region (wage agree­ments that often aren’t adhered to). A big change to Ger­many’s min­i­mum wage laws could be com­ing as the price of an SPD coali­tion with Merkel’s CDU. Bet­ter late than nev­er:

Merkel ready to cede on min­i­mum wage to secure coali­tion

BERLIN Sat Nov 16, 2013 9:43am EST

(Reuters) — Ger­man Chan­cel­lor Angela Merkel has sig­naled her readi­ness to accept the Social Democ­rats’ (SPD) demand for a legal min­i­mum wage in order to secure their agree­ment to form a gov­ern­ing coali­tion, as nego­ti­a­tions enter the final stretch.

Merkel began prepar­ing her con­ser­v­a­tives for a com­pro­mise by telling a Chris­t­ian Democ­rats (CDU) youth ral­ly late on Fri­day that the 8.50 euros per hour pay floor which the SPD demands “will play a role” in future.

“It won’t be our vision of a min­i­mum wage,” she added, con­ced­ing her par­ty was unlike­ly to get its own way over the SPD on the issue.

...

Merkel wants to form a gov­ern­ment by Christ­mas and talks on pol­i­cy com­pro­mis­es should cul­mi­nate in the next 10 days.

The SPD has giv­en up its cam­paign promise to hike tax­es on the rich but will not budge on the min­i­mum wage. Near­ly half a mil­lion SPD mem­bers will vote on the coali­tion deal by ear­ly Decem­ber, inject­ing more uncer­tain­ty into the whole process.

The con­ser­v­a­tives are in favor of set­ting min­i­mum wages — but on a sec­tor-by-sec­tor basis, at lev­els agreed by employ­ers and work­ers rather than decid­ed cen­tral­ly in Berlin. For the SPD, it is 8.50 euros across the board — or no coali­tion.

“Now you have to deliv­er, dear con­ser­v­a­tives,” SPD Chair­man Sig­mar Gabriel told a par­ty con­gress in Leipzig on Sat­ur­day.

Merkel’s par­lia­men­tary leader Volk­er Kaud­er also pre­pared for a com­pro­mise by telling the mass-cir­cu­la­tion Bild am Son­ntag paper, in com­ments released before pub­li­ca­tion, that “growth and employ­ment must not suf­fer” from its intro­duc­tion. Some busi­ness lead­ers are wor­ried that it will under­mine com­pet­i­tive­ness.

Kaud­er said it might be wise to intro­duce the min­i­mum wage more grad­u­al­ly in the for­mer East Ger­many — where pay is low­er and unem­ploy­ment high­er — to avoid putting jobs at risk. But trade unions who back the SPD might find that hard to accept.

...

No tax hikes on the rich but an across the board min­i­mum wage: The joys of com­pro­mise! It also remains to be seen how per­ma­nent these changes will be if they’re imple­ment­ed. As Merkel puts it, the min­i­mum wage “floor” is not in the CDU’s “vision”. Is this going to be a tem­po­rary min­i­mum wage “floor” that only lasts through the dura­tion of the coali­tion? We’ll have to wait and see. But it’s good to see the SPD make an across the board min­i­mum wage a basic demand for to join­ing the CDU in a coali­tion (East Ger­man work­ers should prob­a­blybreath an extra sigh of relief). 8.50 euros/hour is high­er than in many EU coun­tries and actu­al­ly 45% high­er than the min­i­mum wage in the US (that’s not as impres­sive as it sounds). And if the views of Ger­many’s busi­ness lead­ers and chief econ­o­mists are any indi­ca­tion of what we can expect from Ger­many’s eco­nom­ic estab­lish­ment going for­ward, a nation­al min­i­mum wage is going be treat­ed like nation­al can­cer:

Opin­ion
Reuters The Great Debate

Will a min­i­mum wage destroy Ger­man jobs?
By Peter Gum­bel
Novem­ber 7, 2013

Ger­many has once again become the world’s favorite whip­ping boy, round­ly crit­i­cized over the past few days by the U.S. Trea­sury, a top Inter­na­tion­al Mon­e­tary Fund offi­cial and the Euro­pean Com­mis­sion pres­i­dent, among oth­ers, for run­ning record trade and cur­rent account sur­plus­es that are sup­pos­ed­ly detri­men­tal to the Euro­pean and glob­al econ­o­my.

The argu­ments con­tin­ue, with the Ger­mans them­selves say­ing that the sur­plus­es are sim­ply the hap­py result of the nation’s indus­tri­al com­pet­i­tive­ness and don’t hurt any­one else. Lost in the debate, how­ev­er, is what’s hap­pen­ing in Berlin right now. As Chan­cel­lor Angela Merkel seeks to form a new coali­tion gov­ern­ment, she appears to be on the verge of throw­ing out some of the very poli­cies that under­pin the export boom of the past decade.

Most con­tro­ver­sial­ly, the new gov­ern­ment to be formed is like­ly to intro­duce a min­i­mum wage, a nov­el­ty for Ger­many, and a move that both sym­bol­i­cal­ly and in real­i­ty would her­ald the end of the tough wage restraint that has char­ac­ter­ized the past decade. A range of social pol­i­cy changes, includ­ing a pos­si­ble reduc­tion in the retire­ment age, are also being dis­cussed, as is high­er gov­ern­ment spend­ing.

It’s not clear whether such shifts would pro­vide the boost to domes­tic spend­ing that the U.S. and Germany’s oth­er crit­ics are demand­ing. But their very prospect is send­ing chills down the spines of Ger­man busi­ness lead­ers. Ulrich Gril­lo, pres­i­dent of the Fed­er­a­tion of Ger­man Indus­tries, warns that “Ger­many can’t afford a grand coali­tion of elec­tion gifts,” and says that the politi­cians are act­ing as though Germany’s con­tin­u­ing pros­per­i­ty is a giv­en, rather than some­thing that needs to be worked at.

Deutsche Bank says flat­ly in a research report that the pro­posed min­i­mum wage is “the wrong pol­i­cy choice.”

The shifts in eco­nom­ic pol­i­cy are com­ing about as a result of polit­i­cal neces­si­ty. Merkel scored strong­ly in the Sep­tem­ber 22 par­lia­men­tary elec­tions, but her Chris­t­ian Demo­c­ra­t­ic Union par­ty didn’t win enough votes to gov­ern alone. The party’s top offi­cials have spent the past few weeks locked in nego­ti­a­tions with the oppo­si­tion Social Democ­rats over the shape of a coali­tion gov­ern­ment, and they have already giv­en way on a num­ber of points, includ­ing the intro­duc­tion of a min­i­mum wage of 8.5 euros per hour (about $11.50 at cur­rent exchange rates).

Ger­many is unusu­al in that it doesn’t cur­rent­ly have a nation­al min­i­mum wage; pay scales for dif­fer­ent indus­tries are tra­di­tion­al­ly fixed by man­age­ment and union orga­ni­za­tions, in reg­u­lar rounds of nego­ti­a­tions. Two ele­ments of the planned min­i­mum wage are notable. The first is the lev­el being pro­posed, which is 45 per­cent above the U.S. min­i­mum wage — con­sid­er­ably high­er than that in some oth­er Euro­pean coun­tries such as Spain, although below France and the Nether­lands. The Hans Böck­ler Stiftung’s Insti­tute of Eco­nom­ic and Social Research has a handy guide to min­i­mum wage rates around the world here.

The sec­ond notable ele­ment is its expect­ed broad appli­ca­tion, across the whole of Ger­many, East and West, and includ­ing new entrants to the job mar­ket. This amounts to a roll­back of the strin­gent poli­cies put in place by Merkel’s pre­de­ces­sor Ger­hard Schröder, start­ing in 2002, at a time when the Ger­man econ­o­my was strug­gling to digest the impact of reuni­fi­ca­tion after the fall of the Berlin Wall.

Schröder, a Social Demo­c­rat, worked togeth­er with the for­mer head of human resources at Volk­swa­gen, Peter Hartz, to devise poli­cies that cre­at­ed jobs, in part through the intro­duc­tion of low-paid “mini jobs” that were exempt from social secu­ri­ty charges. These were designed to get hard-to-employ peo­ple back into the work­force. The result has been spec­tac­u­lar: Germany’s cur­rent unem­ploy­ment rate, of just over 5 per­cent, is half what it was a decade ago, and far below the 12.2 per­cent aver­age job­less rate in the euro zone. And Ger­man pro­duc­tiv­i­ty gains since then have far out­stripped the mod­est rise in unit labor costs, pro­pelling the cur­rent export boom.

Cur­rent­ly, about 12 per­cent of work­ers in West­ern Ger­many earn below 8.5 euros per hour, while in the east­ern part, the fig­ure is about one in four, accord­ing to research by the IWH insti­tute in Halle.

Deutsche Bank is now pre­dict­ing that the planned min­i­mum wage would reverse some of the ben­e­fi­cial effect of the Hartz reforms and would like­ly increase labor costs gen­er­al­ly, because the 8.5 euro lev­el would be close to the medi­an wage. The bank esti­mates that between 450,000 and one mil­lion jobs will be lost as a result.

In the­o­ry, the min­i­mum wage would boost over­all pur­chas­ing pow­er, going some way to address the inter­na­tion­al crit­i­cism. But Hans-Wern­er Sinn, head of the IFO Insti­tute for Eco­nom­ic Research in Munich, argues that it would mere­ly push up the price of Ger­man goods and make them less com­pet­i­tive, with­out lead­ing to a sig­nif­i­cant increase in con­sump­tion of imports. “There will be a bit­ter sober­ing up,” he warns.

For their part, advo­cates of the min­i­mum wage argue that sim­i­lar­ly dire gloom-and-doom sce­nario pre­dict­ed in Britain back in 1998, when the gov­ern­ment of Tony Blair intro­duced one, have failed to mate­ri­al­ize. The British min­i­mum wage is the equiv­a­lent of $10 per hour, below the planned Ger­man lev­el. How­ev­er, the British one is scaled so that appren­tices and those under 21 receive sub­stan­tial­ly low­er amounts.

...

With 12% of work­ers in the west and 25% of work­ers in the East cur­rent­ly mak­ing less than 8.50 euro/hour it’s going to be very inter­est­ing to see what impact this could have on local economies. Espe­cial­ly those in the east filled with low-wage “mini-jobs”. This could be a pret­ty excit­ing exper­i­ment to watch!

Com­mon wis­dom can be depress­ing
Still, it’s hard to see how this will be a per­ma­nent change. At least not with­out some sort of EU man­date. As Hans-Wern­er Sinn reminds us, Ger­many’s estab­lish­ment tends to fol­low a dis­tinct Ordolib­er­al mar­ket-wor­ship­ping form of utopi­anism. The inabil­i­ty to set real­ly low wages is an unac­cept­able dis­tor­tion of the mar­ket accord­ing to com­mon wis­dom:

‘Five Wise Men’ warn Ger­many not to relax

AFP | 13 Nov 2013, 10:47
Ger­many must not ease up or back track on eco­nom­ic reforms, the gov­ern­men­t’s pan­el of eco­nom­ic advi­sors said on Wednes­day as the Euro­pean Com­mis­sion placed the coun­try under scruti­ny for its large trade sur­plus.

In their annu­al report pre­sent­ed to Chan­cel­lor Angela Merkel, the Ger­man Coun­cil of Eco­nom­ic Experts, or so-called “Five Wise Men”, warned that Europe’s biggest econ­o­my must not rest on its lau­rels.

Their report comes against a back­ground of some crit­i­cism from abroad that Ger­many is too suc­cess­ful in build­ing up a huge trade sur­plus and should do more to stim­u­late con­sump­tion at home and so draw in imports, notably from the rest of Europe.

“The present eco­nom­ic sit­u­a­tion and Ger­many’s healthy posi­tion com­pared to the euro area’s cri­sis coun­tries seem to have obstruct­ed many politi­cians’ view of the major future chal­lenges,” the report said.

Fol­low­ing the gen­er­al elec­tion on Sep­tem­ber 22nd, Merkel’s con­ser­v­a­tive CDU and CSU par­ties have been hold­ing talks on a pos­si­ble “grand coali­tion” with the Social Demo­c­rat SPD.

Among a range of dif­fer­ent mea­sures under dis­cus­sion are pos­si­ble exemp­tions to the new retire­ment age of 67, min­i­mum wages and tax increas­es.

“Future chal­lenges will be far more dif­fi­cult to over­come if the Agen­da 2010 reforms become dilut­ed or reversed in some cas­es,” the experts warned.

“The same holds for mea­sures which hurt growth and job cre­ation, such as min­i­mum wages and tax increas­es.”

In the euro­zone’s long and debil­i­tat­ing cri­sis, Ger­many has fared much bet­ter than its Euro­pean neigh­bours thanks to deep and painful struc­tur­al mea­sures, known as Agen­da 2010, ini­ti­at­ed by the pre­vi­ous SPD admin­is­tra­tion.

Merkel has con­sis­tent­ly argued that oth­er coun­tries should fol­low Ger­many’s exam­ple and get their economies in order.

But the pan­el believed that Ger­many is still fac­ing con­sid­er­able chal­lenges of its own.

“The Ger­man gov­ern­ment should not give the impres­sion that it expects – or even demands — painful adjust­ment process­es from oth­er coun­tries, but shies away from unpop­u­lar mea­sures for Ger­many,” the report said.

...

Notice that, accord­ing to the high­ly influ­en­tial Five “Wise” Men, the “major future chal­lenges” for Ger­many all seem to only be sur­mount­able with ongo­ing aus­ter­i­ty and a refusal to let up on the “painful adjust­ments” and “deep and painful struc­tur­al mea­sures” of Ger­many’s “Agen­da 2010” aus­ter­i­ty poli­cies. It’s a reminder that the advo­cates of aus­ter­i­ty poli­cies might hint of them being just tem­po­rary mea­sures but they aren’t actu­al­ly meant to be tem­po­rary. Lit­tle known fact: The race to the bot­tom has no fin­ish line.

Con­tin­u­ing...

...

The Euro­pean Com­mis­sion on Wednes­day also placed Ger­many under scruti­ny for its inter­na­tion­al trade sur­plus, seen as an obsta­cle to recov­ery across the rest Europe.

“The issue is whether Ger­many ... could do more to help rebal­ance the Euro­pean econ­o­my,” Com­mis­sion Pres­i­dent Jose Manuel Bar­roso said after plac­ing 15 oth­er coun­tries under scruti­ny for fail­ing to meet EU eco­nom­ic tar­gets.

Bar­roso was speak­ing as the Com­mis­sion also ordered “deci­sive pol­i­cy action” from deficit-strug­gler France, Italy and Hun­gary.

Between now and May, the Com­mis­sion using new pow­ers is to scru­ti­nize the eco­nom­ic pro­grammes of the 16 coun­tries to ensure that they are in line with over­all coher­ent eco­nom­ic man­age­ment of the euro­zone and Euro­pean Union economies.

The head of the EU exec­u­tive said the focus also had to include coun­tries with sur­plus­es con­sid­ered exces­sive, after years of con­cen­trat­ed efforts to orga­nize bailouts and dri­ve down pub­lic deficits.

“This is not about the EU run­ning economies in place of nation­al gov­ern­ments,” Bar­roso said. It is about “ensur­ing that what is good for indi­vid­ual states is good also for the EU,” he stressed, open­ing a new phase of what he called “bold­er” cross-bor­der eco­nom­ic pol­i­cy-mak­ing.

...

“Lib­er­al­is­ing” Ger­many the ser­vice sec­tor: the obvi­ous solu­tion?
As the above arti­cle points out at the end, the deci­sion of the “Five Wise Men” to oppose a Ger­man min­i­mum wage as part of the CDU’s coali­tion-build­ing com­pro­mise is tak­ing place right when Ger­many has come under inves­ti­ga­tion by the Euro­pean Com­mis­sion over whether or not Ger­many’s extreme­ly high cur­rent account sur­plus (its high sav­ings/­ex­port-dri­ven econ­o­my) is harm­ing the Euro­pean econ­o­my by fos­ter­ing endem­ic desta­bi­liz­ing trade imbal­ances that force defla­tion and aus­ter­i­ty as the only remain­ing option for rebal­anced euro­zone mem­bers.

The basic solu­tions are either for the ail­ing South­ern Euro­pean economies to export more to Ger­many or for them to con­tin­ue down the path of “inter­nal deval­u­a­tion”. The first option is the desir­able choice if one wants to avoid a “lost gen­er­a­tion”. The sec­ond option is the one to pur­sue when when one believes that a gen­er­a­tion must be lost in order to make up for past sins. So what does Euro­pean Com­mis­sion­er Jose Manuel Bar­roso have in mind to stim­u­late Ger­many domes­tic demand of their neigh­bor’s ser­vices? More the for­mer or some­thing clos­er to the lat­ter? Con­sid­er­ing Mr. Bar­roso’s recent his­to­ry with aus­ter­i­ty poli­cies one might fear he’s lean­ing towards the lat­ter. Espe­cial­ly since his plans for Ger­many’s rebal­anc­ing with the rest of Europe appear to cen­ter around “lib­er­al­iz­ing” Ger­many’s ser­vice sec­tor:

Finan­cial Times
Last updat­ed: Novem­ber 13, 2013 1:08 pm
Brus­sels launch­es inquiry into Germany’s cur­rent account sur­plus
By Peter Spiegel in Brus­sels and Ste­fan Wagstyl in Berlin

José Manuel Bar­roso has launched an inquiry into whether Germany’s large cur­rent account sur­plus is harm­ing the Euro­pean econ­o­my, draw­ing Brus­sels into a heat­ed debate over Berlin’s role in glob­al eco­nom­ic health.

The Euro­pean Com­mis­sion pres­i­dent took pains to empha­sise on Wednes­day that the commission’s “in-depth review”, was part of its annu­al exam­i­na­tion of euro­zone economies and was not intend­ed to crit­i­cise the com­pet­i­tive­ness of Ger­man indus­try or its broad­er econ­o­my.

But he said there were parts of the Ger­man econ­o­my, par­tic­u­lar­ly the ser­vice sec­tor, that should be lib­er­alised, and oth­er EU offi­cials called on Berlin to increase infra­struc­ture invest­ment to stim­u­late demand.

“We would like to have more Ger­manys in Europe,” Mr Bar­roso said. “Our prob­lem could nev­er be Ger­man com­pet­i­tive­ness but whether Ger­many, the EU’s eco­nom­ic pow­er­house, could do more to help the rebal­anc­ing of the EU econ­o­my.”

In Berlin, there was cross-par­ty rejec­tion of Brus­sels’ con­cerns. Her­mann Gröhe, sec­re­tary-gen­er­al of Chan­cel­lor Angela Merkel’s Chris­t­ian Democ­rats, said exports were “a cor­ner­stone of our pros­per­i­ty”. Alexan­der Dobrindt, head of the CDU’s Bavar­i­an sis­ter par­ty, said: “You can­not strength­en Europe by weak­en­ing Ger­many.”

Social Demo­c­ra­t­ic and Green par­ty lead­ers were sim­i­lar­ly crit­i­cal and Jens Wei­d­mann, pres­i­dent of the Bun­des­bank, said cri­sis-hit euro­zone coun­tries would not prof­it much from more expan­sive fis­cal pol­i­cy in Ger­many.

“The pos­i­tive knock-on effects would be lim­it­ed,” Mr Wei­d­mann said, adding that the answer to Germany’s sur­plus could not be to low­er the com­pet­i­tive­ness of Ger­man com­pa­nies.

...

When the term “lib­er­alise” is used by euro­crats like Mr. Bar­roso, it almost always trans­lates into “low­er pay, few­er reg­u­la­tions, and few­er work­er pro­tec­tions”. Is there any rea­son to assume that isn’t part of the planned reform pack­age? Sure, sup­press­ing Ger­man wages would­n’t actu­al­ly help stim­u­late the euro­zone or increase Ger­man domes­tic spend­ing, but what pro­pos­als put for­ward to date real­ly have been help­ful? Mario Draghi’s occa­sion­al emer­gency dec­la­ra­tions from the ECB? What else?

More impor­tant­ly in the long-run, is this focus on “liberis­ing” Ger­many’s ser­vice sec­tor a sign that the Euro­pean Com­mis­sion and Berlin are going to use the need for changes to the Ger­man econ­o­my as an excuse to being impos­ing more “struc­tur­al reforms” (wage sup­pres­sion and union-bust­ing) in Ger­many now too? The min­i­mum wage might be ris­ing, at least tem­porar­i­ly, but they could fall for bet­ter paid work­ers. Is Ger­many’s own “inter­nal deval­u­a­tion” going to be solu­tion to the prob­lem? Because what’s going to hap­pen when Ger­many lib­er­al­izes its ser­vice sec­tor and the ben­e­fits to the rest of the EU don’t mate­ri­al­ize? Or it’s help­ful, but to the coun­tries that need it most. What then? Well, they can always “lib­er­alise” the Ger­man ser­vice sec­tor even more. That’s how the EU works, right? Just keep apply­ing liberi­sa­tion and/or aus­ter­i­ty poli­cies until some yet-to-be deter­mined state of in har­mo­nized mar­ket nir­vana is reach, right? Or maybe a whole bunch of EU coun­tries could all lib­er­alise their ser­vice sec­tors at the same time to cre­ate some sort of new har­mo­nized mar­ket syn­er­gy that will boost exports from the P.I.I.G.S.?

These are the kinds of ques­tions that raise a larg­er ques­tion regard­ing the future of the EU’s peo­ple: How long can the cur­rent “rich country/notably poor­er coun­try” par­a­digm con­tin­ue in the EU while mar­ket inte­gra­tion — like ser­vice sec­tor lib­er­al­i­sa­tion and inte­gra­tion — is just a built in assump­tion going for­ward? Isn’t all the “inter­nal deval­u­a­tion” of the P.I.I.G.S.‘s economies going to start bleed­ing right back into the wealth­i­er EU mem­bers now that these economies are in an unstop­pable march towards a sin­gle mar­ket? The EU right-wing has dreamed of turn­ing Europe in to one giant per­ma­nent­ly “com­pet­i­tive” zone for years so some sort of Ger­man “inter­nal deval­u­a­tion” as part of the EU’s rebal­anc­ing act should­n’t be con­sid­ered an impos­si­bil­i­ty. Espe­cial­ly in the medi­um-term. As the “Five Wise Men” warned us above, Ger­many’s suc­cess in over­com­ing its long-term chal­lenges hinges on its abil­i­ty to main­tain its self-impose aus­ter­i­ty poli­cies. When that’s the long-term prog­nos­ti­ca­tion and some­where between 1/8 and 1/4 of work­ers are already earn­ing less than the pro­posed new min­i­mum wage of 8.50 euro/hour aus­ter­i­ty is a per­ma­nent pol­i­cy. Poli­cies that but­tress and fur­ther the exist­ing wage sup­pres­sion and gen­er­al “lib­er­al­i­sa­tion” of the econ­o­my are just a mat­ter of time:

Low wages, the flip-side to Germany’s eco­nom­ic mir­a­cle

Agence France-Presse
2:12 pm | Sun­day, Sep­tem­ber 15th, 2013

BERLIN – Chan­cel­lor Angela Merkel often boasts dur­ing the cam­paign for Sep­tem­ber 22 elec­tions that Ger­many has one of Europe’s low­est job­less rates – at around 6.8 per­cent. But it comes at a price.

As many as three mil­lion peo­ple in Europe’s top econ­o­my earn less than six euros ($7.90) per hour, mean­ing Ger­many has one of the biggest shares of low wages in Europe, a fact that Merkel’s crit­ics have jumped on in the cam­paign.

“We’ve become a coun­try of low wages,” sighs char­i­ty work­er Renate Stark, who every­day con­fronts the strug­gle of work­ers paid too lit­tle to make ends meet, despite Germany’s boom­ing econ­o­my.

From piz­za deliv­er­ers earn­ing an hourly six euros, to young jour­nal­ists on less than 750 euros a month, the 55-year old social assis­tant for the Catholic Car­i­tas orga­ni­za­tion in Berlin can reel off many such exam­ples.

...

Like hun­dreds of oth­ers, Stark said, he most­ly scrapes by thanks to cer­tain wel­fare ben­e­fits, but when that’s not enough, “when the wash­ing machine breaks down or an elec­tric­i­ty bill arrives unex­pect­ed­ly,” he turns to char­i­ties.

“I expe­ri­ence it here dai­ly,” she told AFP. “I began this job 21 years ago and it wasn’t like that. The sit­u­a­tion has become real­ly seri­ous in the past five or six years. It’s very clear.”

To be sure, many of those employed by Germany’s mighty indus­tri­al giants, for exam­ple in the auto­mo­bile sec­tor, enjoy envi­able con­di­tions. But unlike most of its Euro­pean part­ners, Ger­many has no nation­al min­i­mum wage.

Accord­ing to fig­ures com­piled by the IAQ Insti­tute for Work, Skills and Train­ing, more than one in five employ­ees, or near­ly sev­en mil­lion peo­ple, earned less than 8.50 euros per hour in 2011.

By com­par­i­son, the min­i­mum wage in France is just under 9.50 euros per hour.

Fur­ther­more, the boom in low-wage jobs has been accom­pa­nied by a cor­re­spond­ing rise in “pre­car­i­ous” work, such as part-time or tem­po­rary work.

There are also so-called “mini-jobs” where employ­ees are paid a max­i­mum of 450 euros a month and are exempt from pay­ing social or wel­fare con­tri­bu­tions.

Near­ly eight mil­lion peo­ple were in such low-pay or mini-job forms of employ­ment in 2012, almost twice as many as 20 years ago, accord­ing to data by the fed­er­al sta­tis­tics office Desta­tis.

“Ger­many is the EU coun­try where the pro­por­tion of low-wage jobs is high­est behind Hun­gary and the Unit­ed King­dom,” said the OECD’s Ger­man expert, Andreas Kap­pel­er, point­ing to a 2010 study.

“Between 1985 and 2008, the wage gap between high and low pay has widened in Ger­many much faster than in the oth­er OECD coun­tries,” he said.

Women and all Ger­mans in the much poor­er have been the most affect­ed by ris­ing impov­er­ish­ment since sweep­ing reforms were pushed through under the for­mer Social Demo­c­rat (SPD) chan­cel­lor, Ger­hard Schroed­er, between 2003 and 2005.

...

Stein­brueck has promised to intro­duce a gen­er­al min­i­mum wage of 8.50 euros as one of his first moves if he is elect­ed chan­cel­lor.

For her part, Merkel has said she wants to com­pel unions and employ­ers to agree min­i­mum wage deals by sec­tor and region.

The process has already begun. Giant ser­vice sec­tor union Ver­di, for exam­ple, recent­ly nego­ti­at­ed a min­i­mum wage of 8.50 euros for hair­dressers by 2015, the thir­teenth such sec­tor-wide agree­ment.

While Merkel occa­sion­al­ly denounces some “unac­cept­able” salaries, she has reject­ed a nation­wide min­i­mum wage which, she sees as the root of Europe’s high lev­els of unem­ploy­ment.

Keep in mind that if Angela Merkel tru­ly views nation­wide min­i­mum wage laws as the root of Europe’s high lev­els of unem­ploy­ment (and there’s no rea­son to assume she does­n’t) then real­ly real­ly low wages for lots of Euro­peans is the plan. The exis­tence of a min­i­mum wage that helps to drag peo­ple out of pover­ty would­n’t be a big deal if lead­ers weren’t plan­ning on hav­ing a large num­ber of peo­ple make very lit­tle mon­ey. And if large num­ber of Euro­peans work­ing at or near the min­i­mum wage is part of the plan the Berlin and Frank­furt have in mind, that means Europe as a whole is going to turn wage defla­tion into one of its long-term glob­al exports. It was a fear of “a defla­tion­ary bias for the euro area, as well as for the world econ­o­my” that prompt­ed the US Trea­sury and IMF to crit­i­cize Ger­many’s pol­i­cy-mak­ers. Those fears expressed by the US Trea­sury and the IMF are fright­en­ing­ly appro­pri­ate if ideas like lib­er­al­is­ing the ser­vice-sec­tor are the kinds of stim­u­la­tive poli­cies we can expect from the EU’s lead­ers going for­ward.

Say hel­low to EU-wide defla­tion: “Europe should copy, not crit­i­cize sur­plus”
Still, the fact that Angela Merkel is open­ly telling the CDU that its going to have to accept a nation-wide min­i­mum wage is a poten­tial­ly great turn of events. Not only is it poten­tial­ly great news in the short-run as a means of stok­ing real Ger­man domes­tic demand and imports but also in the long-run. As for­mer Bun­des­bank chief Alex Weber recent­ly argued, the best way for Ger­many to help lift its neigh­bors out of the euro­zone cri­sis isn’t for Ger­many to make changes that increase domes­tic imports of their euro­zone neigh­bor’s prod­ucts. No, the best pol­i­cy is for those neigh­bors to adopt Ger­many’s policies...plus more defla­tion in ‘periph­ery’:

Ger­man busi­ness: Europe should copy, not crit­i­cize sur­plus
CNBC
Pub­lished: Tues­day, 12 Nov 2013 | 12:47 AM ET
By: Report­ed by Car­olin Roth, writ­ten by Cather­ine Boyle

Axel Weber, chair­man of Swiss bank UBS and for­mer head of Ger­many’s cen­tral bank, has told CNBC that Ger­many’s sur­plus is not a pol­i­cy prob­lem and any inter­na­tion­al crit­i­cism of the coun­try’s eco­nom­ic pol­i­cy was unwar­rant­ed.

Weber joined the Ger­man voic­es defend­ing the coun­try’s eco­nom­ic pol­i­cy in the face of inter­na­tion­al crit­i­cism. The Euro­pean Com­mis­sion, the 28-coun­try Euro­pean Union’s exec­u­tive arm, is set to scru­ti­nize the coun­try’s cur­rent account sur­plus and whether it is neg­a­tive­ly affect­ing the rest of the region.

“Study­ing why Ger­many is so suc­cess­ful inter­na­tion­al­ly is always war­rant­ed,” Weber said. “There are a lot of lessons that many coun­tries in Europe, par­tic­u­lar­ly in the periph­ery, can learn from that.”

“To look at is a pol­i­cy prob­lem is in my view unwarranted...There is very lit­tle that Ger­many does to manip­u­late any of that suc­cess,” Weber added.

Ger­many has faced crit­i­cism from else­where in Europe and even the U.S. Trea­sury over its depen­dence on exports. Last week, it emerged that its for­eign trade bal­ance — the amount by which exports out­strip imports — hit a record high in Sep­tem­ber.

Crit­ics argue that this means that Ger­many should be encour­ag­ing its peo­ple to spend more on for­eign imports and help stim­u­late growth in the rest of Europe.

“A rise in domes­tic demand in Ger­many should help to reduce upward pres­sure on the euro exchange rate, eas­ing access to glob­al mar­kets for exporters in the periph­ery,” Olli Rehn, EU eco­nom­ic and mon­e­tary affairs com­mis­sion­er, argued in a blog post Mon­day.

Joaquin Almu­nia, the EU com­pe­ti­tion com­mis­sion­er, told CNBC on Tues­day that at its week­ly com­pe­ti­tion review meet­ing on Wednes­day, the com­mis­sion would be look­ing at Ger­many’s trade sur­plus.

“We need to take stock, we need to analyse the rea­sons why this sur­plus is above the thresh­old and what are the con­se­quences, and what are the reme­dies if the con­se­quences are neg­a­tive. Tomor­row, we’ll just take stock [of the sit­u­a­tion] we won’t issue rec­om­men­da­tions,” he said.

“I’m not talk­ing about pun­ish­ment, I’m talk­ing about ana­lyz­ing a sit­u­a­tion — the size of a cur­rent accounts sur­plus and what this means –that the sav­ings rate is much high­er than the invest­ment rate in a coun­try and this deserves a care­ful analy­sis.”

How­ev­er, the very fact that the Euro­pean Com­mis­sion was inves­ti­gat­ing Ger­many’s econ­o­my drew crit­i­cism and dis­be­lief from the coun­try’s CEOs.

“It’s like you get pun­ished if you get good grades,” Kas­par Rorsted, chief exec­u­tive of con­sumer goods com­pa­ny Henkel, told CNBC.

“Europe’s biggest com­peti­tor is not with­in Europe, it’s out­side.”

“The Ger­man econ­o­my def­i­nite­ly still depends on strong exports,” Frank Appel, chief exec­u­tive of Deutsche Post DHL, told CNBC.

...

“Europe has been in reces­sion for six quar­ters. Com­ing out of a reces­sion hap­pens in a very dif­fer­ent way (for core and periph­ery). It’s dif­fi­cult to come up with a sin­gle mon­e­tary pol­i­cy,” Weber said.

“Prices and wages have to come down in the periph­ery.”

Turn­ing to the recov­ery from the five-year glob­al finan­cial cri­sis, Weber added that the “nor­mal­iza­tion” of the glob­al econ­o­my is con­tin­u­ing but risks remained. “We are in a phase of nor­mal­iza­tion. The road ahead is long, there is pos­i­tive momen­tum but there are risks,” Weber told CNBC Tues­day.

...

Yes, the atti­tude amongst Ger­man busi­ness elites is appar­ent­ly that “the road ahead is long”, and that road appears to involve prices and wages com­ing down in the periph­ery. Com­ing down more than they already have. It’s all part of the process of “nor­mal­iza­tion”. The EU’s road to New Nor­mal­cy is a long, crap­py road. Espe­cial­ly when every­body’s econ­o­my has to simul­ta­ne­ous­ly be based on high exports and low domes­tic con­sump­tion:

Irish Exam­in­er
Future bleak for those on euro­zone periph­ery

Sat­ur­day, Novem­ber 16, 2013

The euro­zone is at an inflec­tion point. The cri­sis may have abat­ed com­pared with the dai­ly whirl­wind that con­vulsed both mar­kets and gov­ern­ments up to the mid­dle of last year.

COMMENT: John Walsh

A calm­ness of sorts was restored in July 2012 when ECB chief Mario Draghi pledged to do “what­ev­er it takes to save the euro”.

Right now the only thing keep­ing the euro­zone togeth­er is the ECB. But the resolve shown by Mr Draghi is not going down well in Berlin. A nar­ra­tive has tak­en hold in the eurozone’s largest econ­o­my that divides the region into the vir­tu­ous and the sin­ners.

In the vir­tu­ous cor­ner are the Ger­mans and a few north­ern Euro­pean states. From this per­spec­tive, the cause of the cri­sis is a lack of com­pet­i­tive­ness in south­ern Euro­pean coun­tries. These coun­tries must restore com­pet­i­tive­ness through inter­nal deval­u­a­tion. And only when these coun­tries become more like Ger­many, can the euro­zone grow and pros­per.

There are a num­ber of prob­lems with this nar­ra­tive, not least is that inter­nal deval­u­a­tion means slash­ing and burn­ing wages, which fur­ther depress­es con­sump­tion and caus­es a nose­dive in liv­ing con­di­tions and gen­er­al social cohe­sion.

A less Berlin­cen­tric view of the cri­sis would show that the caus­es are much more com­plex and the cul­pa­bil­i­ty is more wide­spread.

The euro­zone is a mon­e­tary union. The Ger­man eco­nom­ic mod­el is based on exports and low domes­tic con­sump­tion. Dur­ing the first decade of the sin­gle cur­ren­cy, recy­cled Ger­man sav­ings made their way to the periph­ery which fuelled a mas­sive cred­it bub­ble. This bub­ble burst with dis­as­trous con­se­quences in 2008.

The Ger­man econ­o­my is run­ning a cur­rent account sur­plus of 6%. Yet the main polit­i­cal par­ty, the CDU, and most promi­nent Ger­man econ­o­mists, are hos­tile to the idea that this has any dam­ag­ing con­se­quences for oth­er euro­zone mem­bers.

Fur­ther­more, the coun­try has done very lit­tle to lib­er­alise its ser­vices sec­tor — a move that would great­ly boost growth across the region. There has also been a chron­ic short­age of pub­lic and pri­vate invest­ment in Germany’s infra­struc­ture, which, if addressed, would do won­ders for the euro­zone. But instead, appar­ent­ly, every­body should fol­low the Ger­man lead.

But if all euro­zone states are busy sav­ing and all wealth cre­ation is set to come from exports, where exact­ly are the mar­kets that will soak up euro­zone exports? Sure­ly, such a ‘beg­gar my neigh­bour’ pol­i­cy would prompt a trade war.

Ms Merkel’s pop­u­lar­i­ty at home is based on unyield­ing com­mit­ment to pro­tect Ger­man tax­pay­ers at all costs. Under no cir­cum­stances will there be any trans­fer union or a bank­ing union that enabled the recap­i­tal­i­sa­tion of banks using pub­lic funds, even though any eco­nom­ic text­book will say it is impos­si­ble to have a mon­e­tary union with­out some sort of fis­cal union.

...

Unless there is a pauline con­ver­sion by the new gov­ern­ment in Berlin when it takes office next month, it will pro­ceed with the Ger­man­i­fi­ca­tion of the euro­zone. It is like­ly just enough will be done to keep the sin­gle cur­ren­cy togeth­er. But for those on the periph­ery, the future will be bleak with a pos­si­ble debt defla­tion­ary spi­ral loom­ing large.

The pre­ced­ing essay rais­es a lot of the crit­i­cal ques­tions that need to be asked right now in EU pol­i­cy-mak­ing cir­cles. And it’s entire­ly under­stand­able that the author is call­ing for Ger­many to lib­er­alise its ser­vices sec­tor and allow the rest of the EU to com­pete in those mar­kets. If Ger­many isn’t inter­est­ed in buy­ing the goods of its EU neigh­bors the ser­vices are going to be the only thing left to trade. There is the remain­ing ques­tion, though: How can Ger­many avoid falling into its own defla­tion­ary spi­ral when all those ser­vice jobs open up to com­pe­ti­tion with the nations that just saw their wages gut­ted by aus­ter­i­ty? There’s a big dif­fer­ence between Ger­many stim­u­lat­ing imports from the EU by spend­ing some of its record high sav­ings on domes­tic invest­ments and new infrac­ture vs Ger­many stok­ing EU imports by open­ing up its ser­vice sec­tor to EU com­pe­ti­tion. Both of these sce­nar­ios will poten­tial­ly help out Ger­many’s EU neigh­bors and add some much need­ed EU infla­tion­ary pres­sures. But only one of those sce­nar­ios has the poten­tial to unleash more defla­tion Ger­many.

Adding to all of this is the fact that a grow­ing “lost gen­er­a­tion” of Euro­pean youth are mov­ing from their bro­ken economies to Ger­many in search of jobs. It’s a pre­dictable con­se­quence of the EU’s aus­ter­i­ty poli­cies that are pred­i­cat­ed on destroy­ing economies to achieve “inter­nal deval­u­a­tion” and become more “export-friend­ly” like Ger­many. Thus far the pri­ma­ry growth in exports has been in defla­tion and unem­ployed youth and Ger­many’s low-wage econ­o­my has been the des­ti­na­tion for many of those youth exports. And there’s no indi­ca­tion this dynam­ic is going to change any time soon. Because all indi­ca­tions are that the “inter­nal deval­u­a­tion” of the P.I.I.G.S. is a delib­er­ate, con­scious pol­i­cy. So more “inter­nal deval­u­a­tion” is what’s on the agen­da and that trans­lates into more export­ed youths trav­el­ing to Ger­many and rest of the remain­ing non-ail­ing euro­zone. It’s great when a young per­son leaves home to expe­ri­ence life in a new coun­try but it’s a lot less great when they’re forced to do so due to appalling­ly high youth unem­ploy­ment rates.

And then say hel­lo to glob­al defla­tion.
As long the mod­el of high trade sur­plus­es and max­i­mal eco­nom­ic “com­pet­i­tive­ness” is the dom­i­nant pol­i­cy frame­work for the EU, the threat of defla­tion and sup­pressed domes­tic demand is prob­a­bly here to stay in the EU. And the longer the EU, and espe­cial­ly the euro­zone, finds itself export­ing defla­tion, the more that defla­tion becomes a glob­al prob­lem:

First Post
Is euro­zone try­ing to become a big­ger Ger­many?
by Vivek Kaul Nov 15, 2013

The US Depart­ment of Trea­sury pub­lish­es a semi-annu­al cur­ren­cy report. The lat­est report released on 30 Octo­ber, 2013, makes a scathing attack on Ger­many. “Ger­many has main­tained a large cur­rent account sur­plus through­out the euro area finan­cial cri­sis, and in 2012, Germany’s nom­i­nal cur­rent account sur­plus was larg­er than that of Chi­na. Germany’s ane­mic pace of domes­tic demand growth and depen­dence on exports have ham­pered rebal­anc­ing at a time when many oth­er euro-area coun­tries have been under severe pres­sure to curb demand and com­press imports in order to pro­mote adjust­ment. The net result has been a defla­tion­ary bias for the euro area, as well as for the world econ­o­my,” the report points out.

So what does this mean in sim­ple Eng­lish? Ger­many has been the export pow­er­house of the world. It exports con­sid­er­ably more than it imports. This is the for­mu­la it has been try­ing to force onto oth­er coun­tries of the Euro­zone as well. Euro­zone is a term used for 17 coun­tries which have adopt­ed euro as their cur­ren­cy.

...

As Albert Edwards of Soci­ete Gen­erale writes in a report titled Pre­pare for the next phase of glob­al cur­ren­cy war – should we blame Ger­many? dat­ed 14 Novem­ber, 2013, “In the run-up to the cri­sis they all pro­mot­ed an inap­pro­pri­ate­ly loose mon­e­tary pol­i­cy that caused a cred­it and hous­ing bub­ble, run­away domes­tic demand growth, osten­si­bly sound gov­ern­ment finances and bur­geon­ing cur­rent account deficits, all financed by a sur­plus nation…predominately Ger­many.”

Coun­tries like Por­tu­gal, Spain, Italy, Greece, Ire­land etc went on a bor­row­ing spree, which ulti­mate­ly led to a hous­ing bub­ble. When the bub­ble burst the bank­ing sys­tem in these coun­tries was in a mess. They had to be bailed out by the Euro­pean Cen­tral Bank(ECB). At the same time coun­tries were forced to fol­low aus­ter­i­ty mea­sures to con­trol gov­ern­ment expen­di­ture. These mea­sures have led to an extreme­ly high lev­el of unem­ploy­ment in these coun­tries. As Ambrose Evans-Pritchard of The Dai­ly Tele­graph point­ed out in a recent col­umn “unem­ploy­ment is 27.8% in Greece, 26.3% in Spain, 17.3% in Cyprus, and 16.5% in Por­tu­gal.. it would be far worse had it not been for a mass exo­dus of EMU refugees….Greek youth unem­ploy­ment is 62.9%.”

...

This has led to a sit­u­a­tion where inter­nal demand in these coun­tries fell dra­mat­i­cal­ly. A fall in inter­nal demand has meant low­er imports. And this in turn has led to exports being greater than imports, and hence a trade sur­plus( a sit­u­a­tion where exports of a coun­try are greater than its imports). The euro­zone trade sur­plus in August 2013 was at $9.5 bil­lion.

Inter­est­ing­ly, the col­lapse of demand with­in these coun­tries has also led to a sit­u­a­tion where Ger­man exports with­in the Euro­zone have fall­en. “It is that actu­al­ly Germany’s trade sur­plus with­in the Euro­zone has col­lapsed to almost zero as the GIIPS (Greece, Italy, Ire­land, Por­tu­gal and Spain)have plunged into depres­sion,” writes Edwards.

This basi­cal­ly means that Ger­many is import­ing as much from oth­er coun­tries in the Euro­zone as it is export­ing to them, lead­ing to a trade sur­plus of almost zero. But it has more than made up for this by run­ning a high­er trade sur­plus with oth­er parts of the world, pri­mar­i­ly Unit­ed States and large parts of Asia.

Hence, it isn’t sur­pris­ing that the Unit­ed States has a prob­lem with Ger­many. While Ger­many is export­ing goods and ser­vices to the Unit­ed States, it isn’t import­ing the same amount back from the Unit­ed States or oth­er parts of the world, for that mat­ter. This means that busi­ness­es in the Unit­ed States and oth­er parts of the world are not export­ing enough, which in turn has an impact on eco­nom­ic growth.

This for­mu­la of run­ning a trade sur­plus by export­ing more and lim­it­ing imports has worked very well for Ger­many. But the ques­tion is will it work for the Euro Zone as a whole? Mar­tin Wolf of The Finan­cial Times feels that the strat­e­gy may not work for two rea­sons. “First, the euro­zone is far too big to achieve export-led growth, as Ger­many has done; and, sec­ond, the cur­ren­cy is like­ly to appre­ci­ate still fur­ther, there­by squeez­ing the less com­pet­i­tive economies all over again.”

The euro is like­ly to appre­ci­ate in the days to come giv­en that both Japan and Unit­ed States are print­ing mon­ey big time in the hope of devalu­ing their cur­ren­cies. Also, this for­mu­la will have polit­i­cal com­pli­ca­tions as well, giv­en that, exports can only hap­pen if some­one else is import­ing. Every coun­try can­not be an exporter at the same time. Some­one has to import as well.

And who will that importer be? San­jeev Sanyal of Deutsche Bank Mar­kets Research writes in a report titled Bret­ton Woods III and the Glob­al Sav­ings Glut dat­ed Octo­ber 8, 2013 “Rein­ter­pret­ed to present con­di­tions, the next round of glob­al eco­nom­ic expan­sion may require the US to revert to its role as the ulti­mate sink of glob­al demand.”

...

“Rein­ter­pret­ed to present con­di­tions, the next round of glob­al eco­nom­ic expan­sion may require the US to revert to its role as the ulti­mate sink of glob­al demand.” At least accord­ing to Deutsche Bank ana­lysts. And they’re prob­a­bly cor­rect. There is sim­ply no way for the entire euro­zone and the larg­er EU to per­sis­tent­ly run net trade sur­plus­es with­out the entire world run­ning per­sis­tent rec­i­p­ro­cal deficits with the EU. Some forms of eco­nom­ic reci­procity can’t be avoid­ed. The EU’s lead­ers, and the lead­er­ship in Berlin espe­cial­ly, have made it very clear in recent pro­nounce­ment that wage sup­pres­sion is a cen­tral com­po­nent of their long-term vision for the euro­zone and “inter­nal deval­u­a­tion” is set to be the default long-term strat­e­gy for EU nations. When one EU mem­ber falls on hard times they should not expect help in the form of increased trade sur­plus­es from the rest of their mem­ber nations. Inter­nal deval­u­a­tion and defla­tion is the pre­de­ter­mined response.

So we should prob­a­bly applaud the SPD for their insis­tence on a nation-wide min­i­mum wage. This real­ly is good news! If noth­ing else, a nation­al min­i­mum wage could help avoid the exploita­tion of the grow­ing num­ber of low-wage young EU migrant work­ers and put a break on the EU’s over­all defla­tion­ary forces. It also might pro­vide some real pro­tec­tions for the most vul­ner­a­ble Ger­man work­ers once the ser­vice sec­tor opens up to com­pe­ti­tion with Ger­many’s aus­ter­i­ty-rav­aged neigh­bors.

But it’s very unclear if this is a per­ma­nent change or a tem­po­rary con­ces­sion. What is becom­ing increas­ing­ly clear is that the high-export/high-sav­ings mod­el that Ger­many has been fol­low­ing since the 1950’s is the plan for the entire euro­zone going for­ward and even­tu­al­ly the entire EU. And that means a wage floor in Ger­many may not do much to pre­vent wages across the rest of the Ger­many econ­o­my from suc­cumb­ing to the defla­tion­ary pres­sures sweep­ing the con­ti­nent. Hav­ing Europe adopt the Ger­many mod­el is a pol­i­cy that can only result in trade con­flicts and greater glob­al imbal­ances in the long run because there aren’t very many options for avoid­ing long-term glob­al wage defla­tion when wage defla­tion is cen­tral to the long term growth strate­gies of one of the wealth­i­est con­ti­nents on the plan­et. There are ways to avoid such a glob­al sce­nario, but they most­ly involve find­ing alien civ­i­liza­tions to trade with. Sure, such aliens might be out there, but after watch­ing us mind­less­ly induce self-rein­forc­ing defla­tion­ary socioe­co­nom­ic death spi­rals the aliens might not want to play our sil­ly games. Solu­tions that might actu­al­ly solve the prob­lem of glob­al wage defla­tion are required.

Discussion

20 comments for “The New World Ordoliberalism Part 3: About That Raise You Wanted...”

  1. Defla­tion? What defla­tion?

    CentralBanking.com
    Wei­d­mann and Draghi go head to head on ECB pol­i­cy

    Draghi, Asmussen and Wei­d­mann lay out their views on the right direc­tion for euro­zone mon­e­tary pol­i­cy; Bun­des­bank pres­i­dent accused by Paul Krug­man of ‘sadomon­e­tarism’

    Author: Cen­tral Bank­ing News­desk

    Source: Cen­tral Bank­ing | 21 Nov 2013

    Three men at the heart of Euro­pean mon­e­tary pol­i­cy today gave dif­fer­ing assess­ments of the pol­i­cy con­duct­ed by the Euro­pean Cen­tral Bank (ECB) to date and where it should go in the future, in impas­sioned speech­es exam­in­ing the prop­er role of cen­tral banks dur­ing a finan­cial and eco­nom­ic cri­sis.

    Mario Draghi, pres­i­dent of the ECB, and Jens Wei­d­mann, his oppo­site num­ber at the Eurosys­tem’s biggest cen­tral bank, the Deutsche Bun­des­bank, took turns address­ing a con­fer­ence in the Ger­man cap­i­tal of Berlin this after­noon.

    Draghi set out to explain the ECB’s recent cut in inter­est rates as a response to “dis­in­fla­tion in slow motion” which has been in train “for sev­er­al months now”.

    Describ­ing Ger­man reser­va­tions over what low inter­est rates would do for savers — Ger­many con­tin­ues to boast the euro­zone’s biggest eco­nom­ic sur­plus — as under­stand­able, Draghi said rais­ing inter­est rates would “only depress the econ­o­my fur­ther”, hit­ting savers who would see returns on assets fall, or even lose their jobs.

    More­over, he said, tar­get­ing infla­tion of below but close to 2% per annum pro­vides a “safe­ty mar­gin against defla­tion­ary risks” for “coun­tries expe­ri­enc­ing infla­tion rates well below the euro area aver­age as part of their adjust­ment process­es”.

    If those coun­tries were to expe­ri­ence defla­tion, their eco­nom­ic adjust­ment pro­grammes could run into “major head­winds as demand suf­fers and real debt bur­dens rise”, Draghi said.

    As for using tight mon­e­tary con­di­tions to encour­age fis­cal and struc­tur­al adjust­ment in euro­zone coun­tries, Draghi said such deci­sions are “ulti­mate­ly the task of polit­i­cal author­i­ties, not mon­e­tary author­i­ties”.

    ECB ‘at the lim­its of its man­date’

    Jörg Asmussen, the Ger­man mem­ber of the ECB’s exec­u­tive board, told an audi­ence in New York today that Japan-style defla­tion­ary pres­sures are “not a sce­nario that we fore­see for the euro area”. Infla­tion expec­ta­tions, he said, “are firm­ly anchored and we see no risks of defla­tion in the medi­um-term”.

    Con­tin­u­ing in an opti­mistic vein, he said he was con­fi­dent the cur­rent decade in the euro­zone is not “lost” — rather, he said “it is being used well”, par­tic­u­lar­ly with the efforts being made on bank­ing union and so-called reform con­tracts to sup­port struc­tur­al reform.

    Mon­e­tary pol­i­cy, said Asmussen, “is clear­ly not the solu­tion to struc­tur­al prob­lems. Yet main­tain­ing price sta­bil­i­ty through a peri­od of adjust­ment is essen­tial.”

    He also told his Amer­i­can audi­ence that the pop­u­lar view of Europe’s cur­rent account sur­plus as a ‘beg­gar-thy-neigh­bour’ pol­i­cy is both “con­tra­dic­to­ry” and “short-term”. “Europe’s con­tri­bu­tion to glob­al demand in the years before the cri­sis came large­ly through gov­ern­ments, firms and house­holds tak­ing on too much debt”, he said. “This had to change,” Asmussen added.

    ...

    Phew! At least there aren’t any risk of Japan-style defla­tion fac­ing the euro­zone in the medi­um-term because that’s a recipe for dis­as­ter, espe­cial­ly for heav­i­ly indebt­ed coun­tries. And, as Jörg Asmussen, it’s not like a decade of a hor­ri­ble econ­o­my and record youth unem­ploy­ment would real­ly be a lost decade. After all, think of all the awe­some “struc­tur­al reforms” that will have tak­en place? So what’s every­one wor­ried about? Sounds like a win-win sit­u­a­tion is unfold­ing!

    Notice, how­ev­er, that Mr. Asmussen did­n’t say any­thing about a lack of defla­tion in the short-term. Maybe there’s a rea­son for that:

    ECB’s Praet warns of defla­tion­ary pres­sures in euro zone

    By Ingrid Melander and Paul Car­rel

    PARIS/FRANKFURT Fri Nov 22, 2013 7:53am EST

    (Reuters) — The Euro­pean Cen­tral Bank’s chief econ­o­mist said on Fri­day the euro zone faces defla­tion­ary pres­sures, and the bank’s pres­i­dent stressed that inter­est rates must remain low “because the econ­o­my is weak”.

    With euro zone infla­tion run­ning at 0.7 per­cent, well below its tar­get of just under 2 per­cent, a raft of ECB speak­ers this week have said it is open to tak­ing fresh mea­sures to sup­port the econ­o­my.

    Vice-Pres­i­dent Vitor Con­stan­cio said on Tues­day “every­thing is pos­si­ble” and both he and eco­nom­ics chief Peter Praet have said asset buy­ing — or quan­ti­ta­tive eas­ing (QE) - is an option after years in which the bank’s pol­i­cy­mak­ers have ruled it out.

    But the more con­ser­v­a­tive minor­i­ty at the bank, who vot­ed against this mon­th’s sur­prise cut in inter­est rates and are led by its Ger­man mem­bers, still seem dead set against any such move.

    ...

    Praet, who sits on the ECB’s six-strong Exec­u­tive Board, said the finan­cial cri­sis had sad­dled the euro zone with a debt bur­den unique in Europe’s post-war his­to­ry because it has cre­at­ed a more defla­tion­ary envi­ron­ment.

    “This is a very dif­fer­ent con­text for the cor­rec­tion of expec­ta­tions (about income), which is more of a debt over­hang,” he told a con­fer­ence at the Bank of France.

    “It has more signs of a bal­ance-sheet reces­sion, which is a pri­ori more of a defla­tion­ary envi­ron­ment than what we had in the 1960s.”

    Anoth­er ECB pol­i­cy­mak­er, Aus­tri­a’s Ewald Nowot­ny, told reporters in Paris the euro zone was not in defla­tion, adding: “I do not see a per­spec­tive of defla­tion.

    Nowot­ny is known to have sided with the ECB’s hawks in the past and all of this week’s sound­ing off still added up for econ­o­mists to a sol­id divide between the fac­tions.

    “They stand ready to act as the Novem­ber cut proves but they don’t yet see a gen­uine risk of defla­tion which demands throw­ing the kitchen sink (at the prob­lem),” said RBS econ­o­mist Richard Bar­well. “A lot of the chat­ter is just remind­ing mar­kets that they still have a sink to throw if they need to.”

    MONEY PRINTING

    The eco­nom­ic case for mov­ing was not aid­ed by an above-fore­cast Ifo sen­ti­ment sur­vey out of Ger­many — one of the mon­th’s most watched indi­ca­tors. It sug­gest­ed the euro zone’s largest econ­o­my con­tin­ues to recov­er slow­ly but has also had a habit of look­ing more pos­i­tive than the hard, state-pub­lished data on out­put over the past few months.

    The OECD threw its weight behind the QE idea this week but, in a telling sign of the fierce resis­tance such an option would face from ECB hawks, Bun­des­bank chief Jens Wei­d­mann said print­ing mon­ey is not the way out of the euro zone cri­sis.

    Berlin’s finance min­is­ter Wolf­gang Schaeu­ble also said blunt­ly on Thurs­day that the bank should not offer “false mon­e­tary stim­u­lus” — a reflec­tion of the long-stand­ing con­cern in Ger­many with mon­ey-print­ing and its infla­tion­ary risks.

    For the moment, the ECB is more like­ly to con­duct anoth­er long-term liq­uid­i­ty injec­tion, or LTRO, like the oper­a­tions which fun­neled over one tril­lion euros in 3‑year loans to banks in late 2011 and ear­ly 2012 at an inter­est rate tied to its main refi­nanc­ing rate. A Reuters poll of mon­ey mar­ket traders point­ed to that hap­pen­ing in the first quar­ter.

    But even an LTRO could meet resis­tance from some Coun­cil mem­bers. Wei­d­mann said on Thurs­day the ECB must ensure its lend­ing oper­a­tions do not become too gen­er­ous.

    “Every­thing is on the table and will be dis­cussed, with liq­uid­i­ty mea­sures the most like­ly option,” said Beren­berg bank econ­o­mist Chris­t­ian Schulz.

    “But giv­en the sharp reac­tion in the Ger­man media after the rate cut and the firm oppo­si­tion to any fur­ther step in the cen­tral Euro­pean cau­cus in the ECB, I think Draghi will not force more right now,” he added.

    Posted by Pterrafractyl | November 22, 2013, 2:32 pm
  2. Here’s a sur­vey that indi­cates just how nec­es­sary a nation­al min­i­mum wage real­ly is in Ger­many: Accord­ing to the sur­vey, 9 out of 10 Euro­peans do not feel their nation­al gov­ern­ments actu­al­ly con­trol their nation’s finances, 4 in 10 Greeks have to bor­row mon­ey to pay their bills, and 1 in 3 Ger­mans can­not ful­fill their finan­cial oblig­a­tions with their cur­rent income:

    Greek Reporter
    4 of 10 Greeks Bor­row Mon­ey to Pay Bills
    By Abed Alloush on Novem­ber 20, 2013

    The tough real­i­ty that hun­dreds of Greek house­holds have to face due to the Greek Eco­nom­ic Cri­sis is depict­ed in a sur­vey that was car­ried out by Trend­box, a Dutch inde­pen­dent research com­pa­ny. In this sur­vey we can see how hard it is for a Euro­pean house­hold to make ends meet as well as ful­fill­ing all finan­cial oblig­a­tions.

    Thir­ty-nine per­cent of Greeks, state that in order to pay the bills, they must bor­row mon­ey either from a mem­ber of their fam­i­ly, or a friend, while oth­ers have no oth­er option than to over­charge their cred­it cards. Fifty-sev­en per­cent of Greek peo­ple, admit that its tough for every­one nowa­days to keep their heads above water. Mean­while 4 out of 10 Greeks that par­tic­i­pat­ed in the sur­vey admit that their income does not ensure a decent way of liv­ing.

    ...

    What is inter­est­ing, are the find­ings of the research con­cern­ing the faith that Euro­peans show in the way their gov­ern­ments and the EU’s insti­tu­tions han­dle the finan­cial affairs. In fact, the vast major­i­ty of the Europeans–9 out of 10–according to Trend­box, believe that their gov­ern­ments and the EU do not actu­al­ly have any author­i­ty over the finan­cial affairs.

    Last but not least, the sur­vey shows that 1 out of 3 Ger­mans can­not afford to ful­fill their finan­cial oblig­a­tions with their cur­rent income. From this fact, we can con­clude that even the coun­tries that are not at the cen­tre of the Euro­pean eco­nom­ic cri­sis, are still affect­ed by it.

    Posted by Pterrafractyl | November 23, 2013, 6:54 pm
  3. Well, hope­ful­ly sto­ries like this com­ing out of Ger­many should be end­ing soon...

    The Local Ger­many Edi­tion
    Pover­ty ris­es despite more peo­ple in work
    As fig­ures show an increase in pover­ty despite record employ­ment rates, and the poten­tial new gov­ern­ment argues about a uni­ver­sal min­i­mum wage, Ger­man job cen­tres are suing employ­ers for pay­ing less than €2 an hour.
    DPA/The Local
    Pub­lished: 26 Nov 2013 14:08 CET

    When busi­ness­es take on peo­ple who have been unem­ployed, the state will top up low wages via job cen­tres to help them into work, but this has led to many cas­es where employ­ers are clear­ly tak­ing advan­tage of the sit­u­a­tion.

    Next month a lawyer from Bran­den­burg will appear in Sen­ften­berg labour court for pay­ing his two office work­ers an hourly rate of €1.70 — mean­ing that although they were work­ing, they were almost ful­ly sup­port­ed by the state.

    Last month the same court ordered a firm in Lün­nenau to pay a sales­man €1,560 in back pay after employ­ing him for just €2.84 an hour. The court said he should have received twice as much. A piz­za deliv­ery firm was sued by the Uck­er­mark job cen­tre for pay­ing its work­ers €1.59, €1.65 and €2.72 an hour.

    There are no num­bers to show how many peo­ple are being paid such pathet­ic wages, which effec­tive­ly con­demns them to remain depen­dent on sub­sis­tence-lev­el gov­ern­ment top-ups, but Berlin and Bran­den­burg state gov­ern­ments are set­ting up a work­ing group on the mat­ter.

    Such wages, along with part-time jobs and shift-work are some of the rea­sons why sta­tis­tics show that although there are more jobs in Ger­many than ever, the risk of being poor here has risen slight­ly.

    The ‘Data Report 2013’ issued by the Nation­al Sta­tis­tics Office, shows that last year 41.6 mil­lion peo­ple in Ger­many had a job — more than ever before, the Süd­deutsche news­pa­per report­ed on Tues­day.

    But at the same time the risk of being poor was ris­ing — 16.1 per­cent of peo­ple in Ger­many were offi­cial­ly clas­si­fied as ‘pover­ty endan­gered’ — a rise of 0.9 per­cent on the fig­ure from 2007. Those who had less than €980 a month were con­sid­ered poor.

    Those most at risk were peo­ple between 18 and 24, as they were most like­ly to be in edu­ca­tion or train­ing — and peo­ple between 55 and 64. Women were also sig­nif­i­cant­ly more like­ly to be poor than men, the num­bers showed.

    ...

    Unfor­tu­nate­ly, sto­ries like this may not be end­ing soon enough. That’s because the agree­ment between the SPD and the CDU allows for busi­ness­es to delay imple­men­ta­tion of the new min­i­mum wage until 2017:

    eurac­tiv
    Paris push­es EU-wide min­i­mum wage in cru­sade against social dump­ing
    Pub­lished 02 Decem­ber 2013

    The new­ly agreed min­i­mum wage in Ger­many may not be imple­ment­ed before 2017. Yet it is cru­cial for lim­it­ing social dump­ing, accord­ing to the French gov­ern­ment, which announced a new offen­sive against low-cost work­ers ahead of next year’s Euro­pean Par­lia­ment elec­tions.

    Six months before the Euro­pean Par­lia­ment elec­tions, French con­cerns about employ­ment issues and social dump­ing were high­er than ever.

    On Wednes­day (27 Novem­ber), the gov­ern­ment announced that a new plan to fight the abuse of “post­ed work­ers” who are sent by their employ­ers to anoth­er EU coun­try on a tem­po­rary basis, often at a low­er cost.

    In France, as in oth­er Euro­pean coun­tries, the EU’s post­ed work­er’s direc­tive, which reg­u­lates such prac­tices, is being increas­ing­ly bypassed, the French gov­ern­ment said in a report. Sophis­ti­cat­ed fraud­u­lent arrange­ments flour­ish all over the French territory,including in the con­struc­tion sec­tor and many oth­ers, it claims.

    This unfair com­pe­ti­tion com­ing from Euro­pean enter­pris­es which oper­ate in France in breach of the post­ed work­ers direc­tive amounts to gen­uine “social dump­ing”, claims the report from the French Coun­cil of Min­is­ters.

    ...

    The French gov­ern­ment will try to con­vince oth­er coun­tries by the Decem­ber sum­mit of EU lead­ers, includ­ing Poland. The aim is to amend the direc­tive on post­ed work­ers by qual­i­fied major­i­ty vot­ing, which is fea­si­ble at min­is­te­r­i­al lev­el. If not, the pro­ce­dure would be much longer.

    “Strenght­en­ing co-oper­a­tion between labour inspec­tion author­i­ties is also nec­es­sary and has yet to be built. Besides, intro­duc­ing a min­i­mum wage in each mem­ber state would be a way to fight against unfair social com­pe­ti­tion,” the French gov­ern­ment assures.

    Meat pro­duc­tion, con­struc­tion, agri­cul­ture

    Impos­ing a min­i­mum wage, spe­cif­ic to each coun­try is one of the demands of many sec­tors of the French econ­o­my.

    Accord­ing to the nation­al union of meat pro­duc­ers, social dump­ing by Ger­many cre­ates big com­pet­i­tive dis­tor­tions, as the cost of labour in France is three times high­er than in Ger­many.

    The union fur­ther cal­cu­lat­ed that the cost of tem­po­rary labour in Ger­many is €7 per hour, while it is €20 in France for a min­i­mum wage with social con­tri­bu­tions, and €30 in Den­mark.

    For these pro­fes­sions, 80% of the added val­ue is relat­ed to the cost of labour.

    The issue was also raised in the con­struc­tion sec­tor.

    “The use of post­ed work­ers via Euro­pean inter­im agen­cies or con­struc­tion com­pa­nies too often means very low wages, breach of the work­ing time and secu­ri­ty rules, social con­tri­bu­tions paid in a dif­fer­ent coun­try”, laments Dider Ridoret, pres­i­dent of the fed­er­a­tion of the con­struc­tion sec­tor.

    A min­i­mum wage in Ger­many in 2017

    The new­ly formed Ger­man coali­tion com­mit­ted to impose a min­i­mum wage in the coun­try at around €8.50 per hour. But the gov­ern­ment is obvi­ous­ly not in a hur­ry to imple­ment the mea­sure.

    Accord­ing to the coali­tion agree­ment adopt­ed on 27 Novem­ber, com­pa­nies can delay the appli­ca­tion of the min­i­mum wage until 2017. But the €8.50 fig­ure may no longer make sense by that time if infla­tion is tak­en into account. And the tem­po­rary work sec­tor, which pos­es the biggest prob­lem for the com­pet­i­tive­ness of French slaugh­ter­hous­es, will not have to adopt the min­i­mum wage until that date.

    So the Ger­man min­i­mum wage might not be arriv­ing in time to real­ly make a dif­fer­ence in the euro­zone’s ongo­ing fight against defla­tion, but at least a nation­al min­i­mum wage is com­ing even­tu­al­ly. And now we’re even see­ing calls from France for an EU-wide min­i­mum wage. It’s progress! Much need­ed progress:

    Greek Reporter
    Drop in Greek Min­i­mum Wage Pre­dict­ed for 2013
    By Abed Alloush on Novem­ber 30, 2013 in Econ­o­my, Labor, Law, Sta­tis­tics, Sur­vey

    Accord­ing to the Orga­ni­za­tion for Eco­nom­ic Co-oper­a­tion and Development’s (OECD) (released by Kathimeri­ni), there is a large decrease in the net salary of the Greeks.

    OECD’s data shows that the net salaries of the Greeks has decreased by 1.7 per­cent com­pared to those of 2000. Those who work in the pri­vate sec­tor have low­er net salaries than bank clerks and those work­ing in the Pub­lic Sec­tor.

    The employ­ees at the Hel­lenic State-owned Enter­prise (DEKO), are the only ones whose net salaries are actu­al­ly high­er than they were back in 2000.

    In detail, OECD’s report shows:

    Net salaries of all employ­ees have increased by 23.2 per­cent dur­ing the peri­od 2000–2009. In the next four years, the net remu­ner­a­tion has dropped by 20.2 per­cent. Thus, the total loss for the peri­od 2000–2012 stands at 1.7 per­cent
    Pub­lic ser­vants have suf­fered a small­er decrease in their net remu­ner­a­tion due to the sig­nif­i­cant raise in their wages dur­ing the peri­od 2000–2009.
    Bank employ­ees have man­aged to get a raise of 17.1 per­cent dur­ing the peri­od 2000–2009. Due to the eco­nom­ic reces­sion, there was a decrease of 17.2 per­cent. Through the years 2000 to 2012, their net salaries were decreased to 3.1, in com­par­i­son to those of 2000.
    Self-employed indi­vid­u­als have seen their wages raised by 24.4 per­cent dur­ing the peri­od 2000–2009, while over the fol­low­ing four years suf­fered pay cuts up to 21.2 per­cent. This result­ed in a decrease in their net salaries by 2 per­cent.
    Last but not least, min­i­mum wage has dropped to the low­est lev­el from 2000 to 2012 due to recent changes in the law. The cur­rent min­i­mum wage, as it is set by law, is 10 per­cent low­er than that of 2000.

    Posted by Pterrafractyl | December 2, 2013, 12:51 pm
  4. Oh look, Wolf­gang Schaeu­ble is reflect­ing back on the peri­od a decade ago when France and Ger­many were exceed­ing the 3% GDP nation­al debt guide­lines. He con­clud­ed it was all a grave mis­take that should not be repeat­ed, which rais­es the ques­tion: since this peri­od of deficit spend­ing imme­di­ate­ly pre­ced­ed Ger­many’s “Agen­da 2010” of planned wage sup­pres­sion and aus­ter­i­ty start­ing in 2005, how well does Ger­many Finance min­is­ter think the Ger­man econ­o­my would have per­formed if that deficit spend­ing had­n’t pre­ced­ed the peri­od of aus­ter­i­ty? And what if the rest of Europe had simul­ta­ne­ous­ly decid­ed to fol­low Ger­many’s lead and slashed their wages in order to gain a com­pet­i­tive advan­tage and, in turn, slashed their Ger­man imports? How would that have turned out for all par­ties involved?

    Bloomberg
    Schaeu­ble Says Fran­co-Ger­man Debt-Rule Break Was Grave Mis­take
    By Rain­er Buer­gin and Patrick Don­ahue Apr 8, 2014 7:18 AM CT

    Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble said the vio­la­tion of deficit rules by pre­vi­ous gov­ern­ments in Ger­many and France was a “grave mis­take” and urged all euro-region coun­tries to stick to the reg­u­la­tions.

    His com­ments to law­mak­ers in the low­er house of par­lia­ment in Berlin today come a week after Pres­i­dent Fran­cois Hol­lande sig­naled that France will seek anoth­er delay to its deficit-cut­ting com­mit­ments in an effort to bol­ster growth.

    “It was a grave mis­take that Ger­many, togeth­er with France, were the first to break the sta­bil­i­ty pact,” Schaeu­ble told law­mak­ers, prompt­ing applause from the ranks of his Chris­t­ian Union bloc. “And we’re draw­ing the lessons from exact­ly that.”

    Schaeuble’s ref­er­ence to the past reflects the chal­lenge Ger­many faces in remind­ing France of its cur­rent oblig­a­tions for euro region finan­cial sta­bil­i­ty with­out alien­at­ing lead­ers of the region’s sec­ond-biggest econ­o­my. Both Ger­many and France vio­lat­ed the bloc’s deficit lim­it of 3 per­cent of gross domes­tic prod­uct in 2004.

    At a joint press con­fer­ence yes­ter­day with his French coun­ter­part, Michel Sapin, Schaeu­ble refrained from crit­i­ciz­ing French poli­cies, say­ing “there are times when it’s eas­i­er for some and some­what hard­er for oth­ers” to obey the rules.

    Ger­many trusts that France will ful­fill its oblig­a­tions under the revamped Sta­bil­i­ty and Growth Pact and is aware of its com­mit­ments and its respon­si­bil­i­ties for the func­tion­ing of the accord that’s to safe­guard bud­get dis­ci­pline, Stef­fen Seib­ert, Chan­cel­lor Angela Merkel’s spokesman, said April 4.

    France’s dead­line for reach­ing the 3 per­cent-of-GDP rule, enforced by the Euro­pean Com­mis­sion, has already been post­poned twice, most recent­ly in Sep­tem­ber. Hol­lande sig­naled last week he may seek anoth­er exten­sion.

    Relax Tar­gets

    The com­mis­sion, the Euro­pean Union’s exec­u­tive arm, must decide whether to relax tar­gets intro­duced over the past three years under rules demand­ed by Merkel’s gov­ern­ment. The lim­its are intend­ed to stop gov­ern­ments run­ning up the kind of debt that forced Greece to ask for two bailouts since 2010 and fueled tur­moil across the region.

    “We will not fos­ter con­fi­dence in Europe if the rules we’ve giv­en our­selves, which we’ve solemn­ly con­firmed time and again, if me make these rules and at the same time have the inten­tion not to adhere to them,” Schaeu­ble told law­mak­ers.

    Also, what would have hap­pened if the Agen­da 2010 lev­els of aus­ter­i­ty were real­ly com­pa­ra­ble in terms of unem­ploy­ment to what’s being demand­ed of the rest of the Europe these days and had­n’t sim­ply fall­en heav­i­ly on Ger­many’s work­ing poor? Would Schaeu­ble still be the finance Min­is­ter if his help­ful advice was being fol­lowed by Europe this whole time? Who knows, but in a bit a good news, Ger­many’s new min­i­mum is com­ing into force. It’s some­thing Schaeuble’s par­ty has been adamant­ly opposed to all along, pos­si­bly because it might actu­al­ly help:

    The Local France
    Is Germany’s min­i­mum wage good for France?

    Pub­lished: 07 Apr 2014 12:16 GMT+02:00
    Updat­ed: 07 Apr 2014 12:16 GMT+02:00

    French finance min­is­ters have long com­plained that Germany’s lack of a min­i­mum wage meant ‘unfair’ com­pe­ti­tion for the French econ­o­my. But with Berlin agree­ing last week to final­ly intro­duce one, does the wob­bling French econ­o­my stand to gain much?

    Speak­ing on a vis­it to an eye­wear fac­to­ry last year, the then French con­sumer affairs min­is­ter, Benoît Hamon, made it clear how France felt about Germany’s con­tin­ued lack of a min­i­mum wage.

    “Some coun­tries in Europe are get­ting around employ­ment direc­tives and under­pay­ing their work­ers,” Hamon said.

    He then went fur­ther, say­ing: “I want Ger­many to have a social pol­i­cy where com­pet­i­tive­ness doesn’t rely on jobs pay­ing €400 a month. I want [Ger­many] to play fair with an eco­nom­ic mod­el that isn’t based on a com­pe­ti­tion for who can pay work­ers the least,” he said.

    Last week the Ger­man cab­i­net took a major step towards grant­i­ng Hamon his wish when it agreed to a nation­al min­i­mum wage of €8.50 ($11.75) per hour — a flag­ship project for the Social Democ­rats (SPD) who share pow­er with Angela Merkel’s con­ser­v­a­tives.

    That wage lev­el is still below France’s own min­i­mum salary which cur­rent­ly stands at €9.53 an hour or €1,445 a month, but it will no doubt be wel­comed in Paris, where a new­ly installed gov­ern­ment is tasked with revi­tal­iz­ing an econ­o­my bur­dened by debt, record high unem­ploy­ment and min­i­mal growth.

    Econ­o­mist Tomasz Michal­s­ki from HEC busi­ness school in Paris said Berlin’s move would help France, but not to the extent min­is­ters like Hamon sug­gest.

    “There’s no doubt a Ger­man min­i­mum wage will help the French econ­o­my, both direct­ly and indi­rect­ly,” Michal­s­ki tells The Local.

    It will have a huge impact on those earn­ing low wages, for exam­ple in the ser­vice indus­try, man­u­fac­tur­ing, or agri­cul­ture where it will help French com­pet­i­tive­ness, because Ger­many had relied on work­ers from East­ern Europe, who were paid peanuts.

    “For exam­ple the meat pack­ing indus­try in Brit­tany has suf­fered in recent years due to the fact that Ger­many has devel­oped its own huge indus­try that was built on low wages. In Brit­tany they just couldn’t com­pete. So now hav­ing a min­i­mum wage in Ger­many will help,” Michal­s­ki says.

    But he says the ben­e­fits of redress­ing the bal­ance will be lim­it­ed.

    “There will not be the same effect for exam­ple in the car indus­try where work­ers earn more than the min­i­mum wage and the salaries are sim­i­lar between the two coun­tries,” he says.

    ...

    Econ­o­mist Thomas Klau from the Euro­pean Coun­cil on For­eign Rela­tions (ECFR) in Paris, says the intro­duc­tion of a min­i­mum wage in Ger­many may actu­al­ly put pres­sure on the French gov­ern­ment to adjust its own.

    “With Germany’s min­i­mum wage being low­er than France’s there may be pres­sure on Paris from Europe to bring down or at least not raise its own lev­el of min­i­mum wage,” Klau told The Local. “The fact Germany’s is low­er may add to the impres­sion that the French have a wel­fare state that they can’t afford.”

    Klau does how­ev­er accept that the high­er cost of liv­ing in France com­pared to Ger­many accounts for the dis­crep­an­cy.

    The min­i­mum wage, which dates back to 1950 in France, is con­sid­ered a sacred part of the country’s wel­fare state, but with unem­ploy­ment lev­els break­ing records each month, there have been mur­mur­ings recent­ly that some­thing dras­tic needs to be done.

    French econ­o­mist Pas­cal Lamy, the for­mer direc­tor gen­er­al of the World Trade Organ­i­sa­tion, offered up a con­tro­ver­sial solu­tion to the unem­ploy­ment cri­sis by sug­gest­ing some tem­po­rary jobs could be paid below the min­i­mum wage.

    “A small job is bet­ter than no job,” he told LCP media. “I wouldn’t have said this 10 or 20 years ago, but with this lev­el of unem­ploy­ment…”

    HEC’s Michal­s­ki doubts a left-wing French gov­ern­ment would ever push through a low­er­ing of the min­i­mum wage or the mea­sure put for­ward by Lamy, but he says “the tide is turn­ing”.

    “I think the coun­try is ready for it, but per­haps not this gov­ern­ment. Maybe the next one,” he said.

    Hooray! Ger­many now has a min­i­mum wage. Now let’s cre­ate a super-low wage sec­tor in France! Two steps for­ward, one step back. It’s the socioe­co­nom­ic Sisyphean Shuf­fle, human­i­ty’s favorite dance.

    Posted by Pterrafractyl | April 8, 2014, 8:32 am
  5. The US had bet­ter watch out when it tries to cross that bridge to a future of fair­er wages and shared pros­per­i­ty. There’s a con­cern troll guard­ing it:

    CNBC
    Behind Janet Yel­len’s infla­tion dilem­ma
    Steve Lies­man | @steveliesman
    4/22/2014

    In 1996, Fed Chair­man Alan Greenspan made a bold and still unsung call. With labor mar­kets tight, unem­ploy­ment low and infla­tion con­cerns sim­mer­ing, he resist­ed pres­sure to hike inter­est rates because he felt that the incip­i­ent tech­no­log­i­cal rev­o­lu­tion would keep a lid on prices.

    Argu­ing against him dur­ing that time was a Fed gov­er­nor only in her sec­ond year on the board. Janet Yellen, tran­scripts of the Fed meet­ing from that year show, was con­cerned that the econ­o­my was “oper­at­ing in an infla­tion­ary dan­ger zone.”

    Fast for­ward to 2014 where Yellen now as Fed chair will face her own chal­lenge to make a bold call and either resist or go along with con­ven­tion­al wis­dom and hold the line on inter­est rates.

    Once again, the press­ing issue is labor mar­kets and the pos­si­bil­i­ty that they could ignite infla­tion in the U.S. econ­o­my. Increas­ing­ly, there are con­cerns that, despite high unem­ploy­ment, the jobs mar­ket may actu­al­ly be tighter than it appears. And any whiff of a rise in wages prompts almost pan­ic-lev­el pro­nounce­ments in bond mar­kets that infla­tion will reignite.

    A chart from Deutsche Bank’s chief inter­na­tion­al econ­o­mist, Torsten Slok, on Tues­day was head­lined: “Wage Infla­tion Now Above Pre-Cri­sis Lev­els.” It not­ed that medi­an week­ly wage gains at around 3 per­cent year over year had for the first time since the end of the reces­sion topped the pre-cri­sis aver­age. “It should be obvi­ous to every­one by now that there is wage pres­sure in the pipeline and that the Fed will turn more hawk­ish lat­er this year,” Slok said.

    Yellen appears to be try­ing to resist what is so obvi­ous to Slok and oth­ers. So far, she has indi­cat­ed a will­ing­ness to accept stronger wage gains. And she has not embraced a the­o­ry from Alan Krueger, the for­mer head of the Coun­cil of Eco­nom­ic Advi­sors, a posi­tion Yellen once held, that there may be con­sid­er­ably less slack in the labor mar­ket than some believe.

    With Fed inter­est rates at zero and its bal­ance sheet now top­ping $4 tril­lion, there is no more sig­nif­i­cant issue in eco­nom­ics today than whether tight labor mar­kets will lead us into and beyond the infla­tion­ary dan­ger zone. The wor­ry is that the Fed has put so much fuel into the econ­o­my that any spark could ignite an infla­tion firestorm.
    ...

    Notice what’s being said so far: A Deutsche Bank econ­o­mist issues a study find­ing that year over year wage gains topped the pre-cri­sis aver­age for the first time since the 2008 finan­cial cri­sis, and now “there is no more sig­nif­i­cant issue in eco­nom­ics today than whether tight labor mar­kets will lead us into and beyond the infla­tion­ary dan­ger zone”. This is the kind fun thought process that takes place when infla­tion becomes a proxy for socioe­co­nom­ic health.

    Con­tin­u­ing...

    ...
    At her first press con­fer­ence in March, Yellen gave her first indi­ca­tion of her views on the issue. “Most mea­sures of wage increase are run­ning at very low lev­els,” she said.

    Yellen went on to pro­vide insight into her think­ing on how high is too high for wages. “In fact, with the pro­duc­tiv­i­ty growth we have and 2 per­cent infla­tion, one would prob­a­bly expect to see, on an ongo­ing basis, some­thing between—perhaps 3 and 4 per­cent wage infla­tion would be nor­mal.”

    Aver­age hourly earn­ings are about 2.1 per­cent annu­al­ly, com­pared with 3.4 per­cent in the year before the reces­sion. Fac­tor­ing in infla­tion, wages have risen just a half point in the past year. That mea­sure is well below the pro­duc­tiv­i­ty gains of 1.3 per­cent, so work­ers con­tin­ue not to be com­pen­sat­ed for their grow­ing effi­cien­cy. Put anoth­er way, wages are not ris­ing any­where near the lev­el of infla­tion plus pro­duc­tiv­i­ty.

    Even if wage growth sparked some infla­tion, Yellen would have rea­son not to pan­ic. In fact, the Fed wants some infla­tion, says econ­o­mist Jared Bern­stein. It’s pre­ferred infla­tion mea­sure, the price index of per­son­al con­sump­tion expen­di­tures, is run­ning just 0.9 per­cent over the year-ago lev­el. The Fed wants 2 per­cent infla­tion. So at least a touch of wage-induced infla­tion would appear to be wel­come by the Fed.

    But Deutsche’s Slok wor­ries about such a devel­op­ment. He said if the Fed stays at zero inter­est rates with a large bal­ance sheet, and wages tick up to even the desired 3 per­cent to 4 per­cent lev­el, that the Fed will be sub­stan­tial­ly behind the curve if wages or infla­tion rise any high­er.

    “For mon­e­tary pol­i­cy to hold wages down, you need to be above the neu­tral rate,” Slok said. “If you wait until wage infla­tion is 3.5 per­cent and then she says now we need to do some­thing, it’s already too late.”

    Jim O’Sul­li­van, chief U.S. econ­o­mist from High Fre­quen­cy Eco­nom­ics, argued that the still-large Fed bal­ance sheet “will con­tin­ue to pro­vide net stim­u­lus for years.” That will fur­ther com­pli­cate Yel­len’s abil­i­ty to rein in wage-induced infla­tion, should it come.

    Yel­len’s choice is fur­ther com­pli­cat­ed by an argu­ment from some­one who should be more ide­o­log­i­cal­ly sym­pa­thet­ic: Prince­ton econ­o­mist Krueger. A recent paper by Krueger has become the flash point for debate over Fed pol­i­cy because it relates direct­ly to the issue of poten­tial wage infla­tion.

    Krueger argues that the long-term unem­ployed, of which there are 3.7 mil­lion, are unlike­ly to come back into the work­force. As a result, his argu­ment goes, they do not exer­cise down­ward pres­sure on wages. His work has prompt­ed some to take out this group when try­ing to gauge actu­al labor slack in the econ­o­my by look­ing at the unem­ploy­ment rate.

    The result: the unem­ploy­ment rate for the short-term unem­ployed is about back to where it was before the reces­sion. The con­clu­sion (although this is not nec­es­sar­i­ly Krueger’s) is that work­ers will soon have the abil­i­ty to nego­ti­ate high­er wage gains that could cause infla­tion.

    Asked about the the­o­ry sur­round­ing Krueger’s work at a recent speech, Yellen said, polite­ly, “it is con­ceiv­able.”

    But she went on to counter it: “I think it’s pre­ma­ture, frankly, to jump to the con­clu­sion that that argu­ment is cor­rect. And I’ve made some argu­ments in oth­er remarks that I’ve giv­en about why I think that the long-term unem­ployed are like­ly to move back more active­ly into the labor force and into the job mar­ket and exert pres­sure on wages and prices as the labor mar­kets strength­ened.”

    Yellen has also point­ed out that 7 mil­lion Amer­i­cans are work­ing part time for eco­nom­ic rea­sons. By increas­ing their hours, they could pro­vide sub­stan­tial more labor to the econ­o­my. Those avail­able hours, the­o­ret­i­cal­ly, should put down­ward pres­sure on wages.

    ...

    You have to love it: Despite the fact that wages are ris­ing no where near as much as pro­duc­tiv­i­ty, Deutsche Bank’s chief inter­na­tion­al econ­o­mist, Torsten Slok, is real­ly con­cerned that wages might rise at an even faster pace in the future unless the Fed pre­emp­tive­ly tries to sup­press them now (as Slok said, “For mon­e­tary pol­i­cy to hold wages down, you need to be above the neu­tral rate”). And even though a faster rise in wages would still be jus­ti­fied giv­en the wage-to-pro­duc­tiv­i­ty gap, the Deutsche Bank researchers con­tin­ue to be con­cerned that the Fed might not have a big enough cush­ion in the future, where the cush­ion is the wages-to-pro­duc­tiv­i­ty gap. And one of the jus­ti­fi­ca­tions the Slok used is a new study that found that the long-term unem­ployed may not be act­ing as an anchor on wages because they’re effec­tive­ly locked out of the job mar­ket.

    In oth­er words, pru­dent mon­e­tary pol­i­cy, accord­ing to Deutsche Bank, requires the cen­tral bank to try to get wage infla­tion to sys­tem­at­i­cal­ly fall behind pro­duc­tiv­i­ty as an anti-infla­tion­ary eco­nom­ic safe­ty mea­sure. And we should also just for­get about try­ing to cre­ate the kind of job mar­ket that might actu­al­ly cre­ate demand for the long-term unem­ployed. Instead, let’s just rely on cre­at­ing a big enough wage-to-pro­duc­tiv­i­ty gap that no one ever becomes con­cerned about infla­tion and then wait for low-infla­tion fairy dust to work its mag­ic. How’s that going to turn out?

    Posted by Pterrafractyl | April 23, 2014, 8:59 am
  6. What’s scari­er than torch­es and pitch­forks in an era of glob­al­iza­tion? Piket­ty pop­ulism. Why? Because when an eco­nom­ic Dark Age goes on long enough, a sud­den exam­i­na­tion of per­va­sive and grow­ing wealth gap can be rather shock­ing. And when there’s real­ly noth­ing the defend­ers of the sta­tus quo can real­ly say to refute Piket­ty’s ideas, pop­u­lar shock trans­lates into elite pan­ic:

    The New York Times
    The Piket­ty Pan­ic
    Paul Krug­man
    APRIL 24, 2014

    “Cap­i­tal in the Twen­ty-First Cen­tu­ry,” the new book by the French econ­o­mist Thomas Piket­ty, is a bona fide phe­nom­e­non. Oth­er books on eco­nom­ics have been best sell­ers, but Mr. Piketty’s con­tri­bu­tion is seri­ous, dis­course-chang­ing schol­ar­ship in a way most best sell­ers aren’t. And con­ser­v­a­tives are ter­ri­fied. Thus James Pethok­oukis of the Amer­i­can Enter­prise Insti­tute warns in Nation­al Review that Mr. Piketty’s work must be refut­ed, because oth­er­wise it “will spread among the clerisy and reshape the polit­i­cal eco­nom­ic land­scape on which all future pol­i­cy bat­tles will be waged.”
    =
    Well, good luck with that. The real­ly strik­ing thing about the debate so far is that the right seems unable to mount any kind of sub­stan­tive coun­ter­at­tack to Mr. Piketty’s the­sis. Instead, the response has been all about name-call­ing — in par­tic­u­lar, claims that Mr. Piket­ty is a Marx­ist, and so is any­one who con­sid­ers inequal­i­ty of income and wealth an impor­tant issue.

    Oh dear God, we’ll be like Swe­den and Nor­way! The hor­ror!

    I’ll come back to the name-call­ing in a moment. First, let’s talk about why “Cap­i­tal” is hav­ing such an impact.

    Mr. Piket­ty is hard­ly the first econ­o­mist to point out that we are expe­ri­enc­ing a sharp rise in inequal­i­ty, or even to empha­size the con­trast between slow income growth for most of the pop­u­la­tion and soar­ing incomes at the top. It’s true that Mr. Piket­ty and his col­leagues have added a great deal of his­tor­i­cal depth to our knowl­edge, demon­strat­ing that we real­ly are liv­ing in a new Gild­ed Age. But we’ve known that for a while.

    No, what’s real­ly new about “Cap­i­tal” is the way it demol­ish­es that most cher­ished of con­ser­v­a­tive myths, the insis­tence that we’re liv­ing in a mer­i­toc­ra­cy in which great wealth is earned and deserved.

    For the past cou­ple of decades, the con­ser­v­a­tive response to attempts to make soar­ing incomes at the top into a polit­i­cal issue has involved two lines of defense: first, denial that the rich are actu­al­ly doing as well and the rest as bad­ly as they are, but when denial fails, claims that those soar­ing incomes at the top are a jus­ti­fied reward for ser­vices ren­dered. Don’t call them the 1 per­cent, or the wealthy; call them “job cre­ators.”

    But how do you make that defense if the rich derive much of their income not from the work they do but from the assets they own? And what if great wealth comes increas­ing­ly not from enter­prise but from inher­i­tance?

    What Mr. Piket­ty shows is that these are not idle ques­tions. West­ern soci­eties before World War I were indeed dom­i­nat­ed by an oli­garchy of inher­it­ed wealth — and his book makes a com­pelling case that we’re well on our way back toward that state.

    ...

    Still, it has been amaz­ing to watch con­ser­v­a­tives, one after anoth­er, denounce Mr. Piket­ty as a Marx­ist. Even Mr. Pethok­oukis, who is more sophis­ti­cat­ed than the rest, calls “Cap­i­tal” a work of “soft Marx­ism,” which only makes sense if the mere men­tion of unequal wealth makes you a Marx­ist. (And maybe that’s how they see it: recent­ly for­mer Sen­a­tor Rick San­to­rum denounced the term “mid­dle class” as “Marx­ism talk,” because, you see, we don’t have class­es in Amer­i­ca.)

    ...

    Now, the fact that apol­o­gists for America’s oli­garchs are evi­dent­ly at a loss for coher­ent argu­ments doesn’t mean that they are on the run polit­i­cal­ly. Mon­ey still talks — indeed, thanks in part to the Roberts court, it talks loud­er than ever. Still, ideas mat­ter too, shap­ing both how we talk about soci­ety and, even­tu­al­ly, what we do. And the Piket­ty pan­ic shows that the right has run out of ideas.

    Part of what makes the Piket­ty phe­nom­e­na so time­ly and so pan­ic-induc­ing to the glob­al oli­garchy is that we’re already well along the tran­si­tion out of the era of unfair­ly shared col­lec­tive pros­per­i­ty and into the era of unfair­ly shared sac­ri­fice. Once human­i­ty and cli­mate change blows through enough of the bios­phere and oth­er non-renew­ables some of the ultra-rich will get rich­er but what about every­one else? Eco­nom­ic sys­tems struc­tured around end­less growth assump­tions and unfair­ly shared pros­per­i­ty can’t go on for­ev­er. End­less growth might work with a flat earth (the non-edged kind), but it’s not a plan­et-friend­ly eco­nom­ic par­a­digm, espe­cial­ly with a stillgrow­ing yet gray­ing glob­al pop­u­la­tion, ongo­ing endem­ic pover­ty and extreme inequal­i­ty all remain­ing part of the equa­tion.

    And yet, as Piket­ty points out in Cap­i­tal­ism, one of the biggest his­tor­i­cal dri­ving fac­tors of per-capi­ta wealth has been the over­all net growth wealth that comes from a grow­ing pop­u­la­tion. Pop­u­la­tion growth is his­tor­i­cal­ly inter­twined with ris­es in the wealth of aver­age indi­vid­u­als and also spread­ing of wealth around out of the hands of the “old mon­ey” and into a larg­er “new mon­ey” econ­o­my. But pop­u­la­tions can’t keep grow­ing for­ev­er, with the glob­al pop­u­la­tion fore­cast to lev­el off by 2100 and declin­ing some coun­tries already a real­i­ty. And this is all hap­pen­ing when real resource con­straints and the obso­les­cence of many types of work­ers are also in the fore­cast. So how is the glob­al econ­o­my sup­posed to func­tion when grow­ing for­ev­er remains an impos­si­bil­i­ty (or dis­as­ter) but end­ing the end­less growth also leads to dis­as­ter and an even greater con­cen­tra­tion of wealth? That’s very unclear:

    The One Chart That Explains Our Grim Eco­nom­ic Future
    The Huff­in­g­ton Post | by Mark Gon­gloff

    Post­ed: 04/23/2014 12:07 pm EDT Updat­ed: 04/23/2014 12:59 pm EDT

    If you’re look­ing for some­body to blame for ris­ing inequal­i­ty, blame babies. Or, rather, the fact that there soon won’t be enough of them.

    A drop-off in pop­u­la­tion growth is a big rea­son why glob­al eco­nom­ic growth is going to slow down in the decades ahead, French econ­o­mist Thomas Piket­ty points out in his new book, Cap­i­tal in the 21st Cen­tu­ry. The top-sell­ing book on Amazon.com is get­ting a lot of atten­tion for its pre­dic­tions of soar­ing wealth con­cen­tra­tion and inequal­i­ty and its call for a mas­sive glob­al tax on the wealthy.

    But a key com­po­nent of Piket­ty’s ris­ing-inequal­i­ty fore­cast is a slow­down in eco­nom­ic growth, which the­o­ret­i­cal­ly means labor income will slow, too. If returns on invest­ment stay high­er than eco­nom­ic growth, as they typ­i­cal­ly have been, then voilà, you’ve got a grow­ing gap between the rich (who own all the invest­ments) and the poor (who get paid for their labor).

    And the slow­er-growth future Piket­ty fore­sees will be at least par­tial­ly the result of slow­ing pop­u­la­tion growth. Typ­i­cal­ly, pop­u­la­tion growth dri­ves about half of all eco­nom­ic growth. Here is a very, very long-term chart by Piket­ty that shows what pop­u­la­tion growth has done since the birth of Christ, along with fore­casts of what it is going to do for the rest of this cen­tu­ry:
    [see chart]

    As you can see from the chart, the world’s pop­u­la­tion grew ver­rrrry slow­ly between the year 0 and 1700. And then it absolute­ly explod­ed between 1700 and 1970, led first by Europe and the Unit­ed States and then by Africa and Asia. The Indus­tri­al Rev­o­lu­tion, improve­ments in health care and a bunch of oth­er stuff con­tributed to this growth. But it can’t go on for­ev­er. Growth rates have already peaked and are start­ing to fall.

    “So what? Who cares?” you might be ask­ing. Slow­er pop­u­la­tion growth could mean ris­ing liv­ing stan­dards and high­er incomes in the very, very long run, as a sta­ble pop­u­la­tion shares in the spoils of ris­ing eco­nom­ic out­put, notes Mark Weis­brot of the Cen­ter for Eco­nom­ic and Pol­i­cy Research. A slow­down in pop­u­la­tion growth is also great news if you’re wor­ried about cli­mate change and resource scarci­ty, as you def­i­nite­ly should be.

    The prob­lem is that, his­tor­i­cal­ly at least, pop­u­la­tion growth and eco­nom­ic growth have gone hand-in-hand, with out­put per per­son rough­ly match­ing pop­u­la­tion growth. Per-capi­ta out­put has been a lit­tle high­er than pop­u­la­tion growth since the Indus­tri­al Rev­o­lu­tion, thanks to pro­duc­tiv­i­ty gains, but not by all that much.

    ...

    Slow­er eco­nom­ic growth is not all good news for the wealthy, either, as it could cut their returns on cap­i­tal and their invest­ment income. But as long as returns on cap­i­tal stay high­er than the eco­nom­ic growth rate, the wealthy will keep pulling ahead of work­ers.

    Mean­while, mid­dling pop­u­la­tion growth also makes inher­it­ed wealth more impor­tant, accord­ing to Piket­ty. When pop­u­la­tion is grow­ing rapid­ly, the “old mon­ey” is spread thin­ner. Faster eco­nom­ic growth also means there’s more “new mon­ey” fly­ing around, which makes old wealth less valu­able. In Piket­ty’s view, the rever­sal of these trends is one rea­son why, in the next cen­tu­ry, “inher­it­ed wealth will make a come­back,” leav­ing the 21st cen­tu­ry look­ing a lot like the 18th and 19 cen­turies.

    Note the impor­tant dis­tinc­tion made between the short-term and long-term con­se­quences of a falling pop­u­la­tion: In the long run, a falling pop­u­la­tion is ben­e­fi­cial sim­ply because it allows more resources to be shared amongst few­er peo­ple and it also might be vital to deal­ing with the impact of cli­mate change and resource deple­tion. But in the short and medi­um-term, falling pop­u­la­tions end up mess­ing up economies that are sim­ply not struc­tured around an assump­tion of falling pop­u­la­tions. So we can expect the under­ly­ing inequal­i­ty to con­tin­ue get­ting worse as glob­al pop­u­la­tions rise and then it poten­tial­ly gets even worse.

    These are the some rea­sons why Piket­ty-pan­ic is very real amongst the glob­al oli­garchy: the eco­nom­ic par­a­digms that have sus­tained and fueled the glob­al oli­garchy might also be lead­ing to a “damned if you do, damned if you don’t sit­u­a­tion” in terms of pol­i­cy-respons­es to the mega-chal­lenges of tomor­row. The cur­rent eco­nom­ic par­a­digm is root­ed in the idea that we need to keep the oli­garchy safe and secure in order obtain pros­per­i­ty for all (trick­le-down pros­per­i­ty). But if Piket­ty is cor­rect, the eco­nom­ic par­a­digms that sys­tem­at­i­cal­ly cre­ate and sus­tain an oli­garchy might simul­ta­ne­ous­ly doom soci­ety. Espe­cial­ly now, when the prospect of “peak-peo­ple” is on the hori­zon. “Peak-peo­ple” should be con­sid­ered a momen­tous achieve­ment if it’s required to avoid can­ni­bal­iz­ing the bios­phere because human­i­ty will might final­ly achieve sus­tain­abil­i­ty. Maybe some tech­no­log­i­cal break­through will solve major loom­ing resource issues, but if not, “Peak-peo­ple” is both need­ed and what’s expect­ed. It could be a great achieve­ment. But it could also become some sort of socioe­co­nom­ic death-trap and a best-sell­ing book just point­ed this out in a very high-pro­file way. That can be a pret­ty Piket­ty-pan­ic-induc­ing elite expe­ri­ence.

    Posted by Pterrafractyl | April 26, 2014, 6:40 pm
  7. One nation, under “the mar­ket”, indi­vis­i­ble with an inter­state race to the bot­tom for all:

    TPM Livewire
    Tom Coburn: I Don’t Believe There Should Be A Nation­al Min­i­mum Wage

    Cather­ine Thomp­son – May 1, 2014, 8:00 AM EDT

    Sen. Tom Coburn (R‑OK) said Thurs­day that he does­n’t believe there should be a nation­al min­i­mum wage.

    Sen­ate Repub­li­cans vot­ed Wednes­day to block debate on leg­is­la­tion to raise the fed­er­al min­i­mum wage to $10.10. In an appear­ance on MSNBC’s “Morn­ing Joe,” Coburn was asked whether he thought the cur­rent min­i­mum wage of $7.25 was suf­fi­cient.

    I don’t believe you ought to inter­fere in the mar­ket. My the­o­ry is if Okla­homans want a min­i­mum wage, we ought to have it,” he said. “I don’t believe there ought to be a nation­al min­i­mum wage.”

    Coburn said Democ­rats’ argu­ment that not rais­ing the min­i­mum wage does an injus­tice to hard-work­ing Amer­i­cans is “malarkey.”

    “The fact is if you look at the OMB stud­ies and you look at the good eco­nom­ic mod­els, the ben­e­fit is small. The cost of lost jobs is great,” he added. “It goes against the free mar­ket prin­ci­ple … We don’t know what the min­i­mum wage should be. How’d they pick $10.10? Why not $22? Why not $100?”

    ...

    One of the inter­est­ing things about the debate over the min­i­mum wage is that you often hear wor­ries about the min­i­mum wage slid­ing up a slip­pery slope up, up, and away to infin­i­ty! And yet, folks like Coburn that would clear­ly like to see the minu­mum wage done away with entire­ly don’t seem too con­cerned about actu­al wages drop­ping to $3.50 or $2. Why? After all, what’s to stop employ­ers that are cur­rent­ly pay­ing undoc­u­ment­ed immi­grant work­ers pover­ty wages from just pass­ing that wage struc­ture to legal work­ers? Aren’t the sub­stan­tial­ly low­er wages wages paid to ille­gal work­ers evi­dence that “the mar­ket” would imme­di­ate­ly send legal wages plung­ing? And then there’s the upcom­ing robot rev­o­lu­tion...

    Sure, there’s always the argu­ment that if wages drop oth­er gov­ern­ment pro­grams like food stamps will kick in, sort of like a poor-man’s ver­sion of Ger­many’s old sys­tem. But there’s also the argu­ment from Coburn’s GOP col­leagues that food stamps should be slashed dra­mat­i­cal­ly and that’s the argu­ment tends to win in DC.

    So if the nation­al min­i­mum wage is dumped and “the mar­ket”, robots and all, gets to start deter­min­ing the low­est wages (the part of the labor mar­ket that sys­tem­at­i­cal­ly deprive work­ers of any real mar­ket clout) in states like Okla­homa and the GOP con­tin­ues to suc­ceed in gut­ting the wel­fare sys­tem, why would­n’t “the mar­ket” cre­ate a socioe­co­nom­ic sta­tus some­where between that of present day ille­gal work­ers and a robot? And what’s that also going to do to the rest of soci­ety?

    Posted by Pterrafractyl | May 1, 2014, 7:52 am
  8. What if the cau­tion of the ‘super rich’ ebbs and they start spend­ing their record cash hoards? Pre­sum­ably the rich will get rich­er because that always seems to hap­pen. And maybe the glob­al econ­o­my will improve too:

    What if the cau­tion of the ‘super rich’ ebbs?

    By Mike Dolan

    LONDON Wed Jun 11, 2014 12:21pm BST

    (Reuters) — Can­ny cau­tion or bum­bling over­sight, the world’s rich­est peo­ple have retained huge stock­piles of zero-yield­ing cash through­out the recent surge in finan­cial asset prices.

    Their per­sis­tence may have, counter-intu­itive­ly, pro­longed the buoy­an­cy of those very assets in the process — help­ing to inflate the out­size wealth of the super-rich fur­ther.

    With the debate about ris­ing inequal­i­ty re-invig­o­rat­ed this year by French econ­o­mist Thomas Piket­ty’s best-sell­ing book on bal­loon­ing wealth gaps, the spend­ing and sav­ings behav­iour of the so-called “plu­ton­o­mists” has rarely seen more scruti­ny or had more influ­ence on the econ­o­my and mar­kets.

    Polit­i­cal clam­our for redress through greater tax­a­tion of asset incomes, rents, gifts and inher­i­tances may well build. But few expect much change in the ris­ing wealth of the rich­est 1 per­cent of house­holds or the 0.1 per­cent deemed ‘high net-worth indi­vid­u­als.’

    Yet as stock mar­kets bar­reled to record highs — with the MSCI’s all-coun­try index up almost 30 per­cent over the past 18 months — invest­ment advi­sors esti­mate up to 40 per­cent of their mon­ey remains un-invest­ed and is still parked in deposits.

    As the lat­est equi­ty mar­ket surge began ear­ly last year, a bench­mark sur­vey by CapGe­meni and RBC Wealth Man­age­ment had aver­age cash or deposit hold­ings among those glob­al wealth investors at almost 28 per­cent — more than the 26 per­cent held in equi­ty or some 20 per­cent in real estate.

    Defin­ing the rich­est 12 mil­lion savers as those with more than $1 mil­lion in investible assets — exclud­ing their pri­ma­ry res­i­dences and col­lectibles — the sur­vey’s high cash hold­ings may sim­ply reflect a pref­er­ence for bank­ing large slices of wealth rather than risk­ing it in volatile mar­kets.

    And, to be sure, returns on the 70 per­cent of oth­er invest­ments would have paid hand­some­ly enough any­way.

    The rich­est have always tend­ed to hold rel­a­tive­ly high lev­els of cash. Liq­uid hold­ings are pre­ferred for wealth pro­tec­tion, tax-avoid­ing mobil­i­ty, inher­i­tances or gifts.

    Yet the sur­vey’s cash lev­els are more than twice the lev­els reg­is­tered in the equiv­a­lent sur­vey from the height of the pre-cri­sis go-go years in 2006 and 2007.

    And with near-zero inter­est rates mean­ing deposits are los­ing mon­ey adjust­ed for infla­tion and with broad mar­ket volatil­i­ty at mul­ti-year lows, the cau­tion is remark­able.

    What’s more, oth­er sur­veys and anec­do­tal evi­dence sug­gest cash hold­ings remain ele­vat­ed or have actu­al­ly risen over the past year.

    A sur­vey of more than 4,000 rich investors — those with more than $200,000 to invest — con­duct­ed at the turn of this year for asset man­agers Legg Mason showed 26.5 per­cent held in cash. An esti­mate by Wells Far­go puts cash hold­ings among the wealth­i­est clients as high as 40 per­cent.

    ...

    PIKETTY AND PLUTONOMISTS

    Piket­ty’s book envis­ages soar­ing inequal­i­ty and wealth gaps as returns on assets out­strip eco­nom­ic growth to such an extent that the ratio of pri­vate wealth to nation­al income ris­es to 1910 peaks of 500 per­cent by 2030 from about 440 per­cent now.

    To the extent that asset infla­tion has been stoked by the easy-mon­ey poli­cies designed to sta­bi­lize the world econ­o­my after the crash, cen­tral banks find them­selves square­ly in the fir­ing line for fuel­ing inequal­i­ty for the sake of job cre­ation.

    The cash-hoard­ing behav­iour of the rich tends to blunt that accu­sa­tion. Yet, how cen­tral bank poli­cies in turn affect that behav­iour may still have far-reach­ing con­se­quences.

    For a start, a head­long dash by wealthy investors to pumped- up mar­kets at this junc­ture could well cre­ate the sort of bub­ble they and cen­tral banks may have good rea­son to fear.

    Already the top 0.1 per­cent of the U.S. spec­trum own some 23 per­cent of U.S. wealth — the equiv­a­lent of bot­tom 90 per­cent put togeth­er. Accord­ing to the U.S. Labour Depart­ment, the top 20 per­cent of the income brack­et has the aver­age pre-tax income equal to the sum of the bot­tom four quin­tiles togeth­er and aver­age expen­di­tures of the bot­tom 60 per­cent com­bined.

    Bank of Amer­i­ca Mer­rill Lynch strate­gist Ajay Kapur coined the term ‘plu­ton­o­my’ in 2005 when he was at Citi and describ­ing economies dom­i­nat­ed by a grow­ing but small cohort of super rich. He reck­ons any eas­ing of post-cri­sis cau­tion among the plu­ton­o­mists could have a pro­found effect on the world econ­o­my.

    “If plu­ton­o­mists get over the shock of the glob­al finan­cial cri­sis, take com­fort in their vast­ly expand­ed wealth from QE-dri­ven asset infla­tion — and reduce their sav­ing rate that dou­bled to 38.2 per­cent after ... 2008 — the U.S. cur­rent account deficit could expand again — a big pos­i­tive for emerg­ing mar­kets.”

    When you read things like:

    Already the top 0.1 per­cent of the U.S. spec­trum own some 23 per­cent of U.S. wealth — the equiv­a­lent of bot­tom 90 per­cent put togeth­er” and “If plu­ton­o­mists get over the shock of the glob­al finan­cial cri­sis, take com­fort in their vast­ly expand­ed wealth from QE-dri­ven asset infla­tion — and reduce their sav­ing rate that dou­bled to 38.2 per­cent after ... 2008 — the U.S. cur­rent account deficit could expand again — a big pos­i­tive for emerg­ing mar­kets.

    you might be tempt­ed to think “on good, now that there’s clear­ly been a ‘trick­le up to the top’ phase we can final­ly watch the wealth trick­le down!”. After all, every ‘trick­le down’ plan always seems to involve an ini­tial ‘trick­le up to the top’ phase, so the mas­sive ‘trick­ling up’ that’s tak­en place glob­al­ly since the start of the 2008 cri­sis must mean that the world is poised for a mas­sive wave of ‘trick­le down’ pros­per­i­ty, right? LOL.

    No, the glob­al ultra wealthy prob­a­bly aren’t going to be trick­ling down much of that wealth any time soon although there is going to be some trick­ling down. It’s the same thing that’s been trick­ling down for years: liv­ing stan­dards. Those should keep falling. Cor­po­rate tax­es might also fall, espe­cial­ly in the EU. The trick­le down poli­cies will end some­day, but some sort of ‘rock bot­tom’ needs to be found first:

    Bloomberg Busi­ness­week
    Ren­zi Should Mim­ic Schroed­er in Cut­ting Tax­es, Berg­er Says
    By Elisa Mar­t­in­uzzi June 15, 2014

    Ital­ian Prime Min­is­ter Mat­teo Ren­zi, who cut tax­es for low­er-income work­ers, should sharp­en eco­nom­ic reforms and fol­low for­mer Ger­man Chan­cel­lor Ger­hard Schroeder’s exam­ple in reduc­ing the fis­cal bur­den, said Roland Berg­er.

    “Ren­zi should use the pop­u­lar sup­port he gained in the Euro­pean elec­tions to make his reform pro­gram a bit tougher,” Berg­er, 76, founder of Roland Berg­er Strat­e­gy Con­sul­tants, said in a June 13 inter­view in Venice, Italy. “The tax sys­tem needs to become more trans­par­ent and invest­ment-friend­ly, cor­po­rate tax­es need to come down. Look at what Schroed­er did.”

    Berg­er, an advis­er to Chan­cel­lor Angela Merkel and for­mer advis­er to Schroed­er, said some economies in periph­er­al Europe are “very weak,” with pub­lic debt and youth unem­ploy­ment weigh­ing on the region. While the econ­o­my of the euro area exit­ed reces­sion last year and is pre­dict­ed to expand 1.1 per­cent in 2014, some of the bloc’s largest economies such as France and Italy are still strug­gling.

    In Italy, “in par­tic­u­lar, things have been devel­op­ing much more slow­ly,” said Berg­er, a mem­ber of the board of Ital­ian pub­lish­er RCS Medi­a­Group SpA. “Every­one is wait­ing for the promised reforms, domes­tic demand is still weak and the tax bur­den and bureau­cra­cy still weigh.”

    Schroeder’s Agen­da 2010 pack­age unveiled in 2003 cut tax­es, made it eas­i­er to fire staff, forced those out of work for more than a year to accept any rea­son­able job offer and reduced long-term ben­e­fits. The efforts helped Ger­man busi­ness­es turn around.

    ...

    “Schroeder’s Agen­da 2010 pack­age unveiled in 2003 cut tax­es, made it eas­i­er to fire staff, forced those out of work for more than a year to accept any rea­son­able job offer and reduced long-term ben­e­fits. The efforts helped Ger­man busi­ness­es turn around.”

    You know what else “helped Ger­man busi­ness­es turn around” fol­low the imple­men­ta­tion of Ger­many’s “Agen­da 2010″ mod­el of aus­ter­i­ty under Ger­hard Schroed­er’s Agen­da (Roland Berg­er was a close advi­sor to Schoed­er too): Not imple­ment­ing Ger­many’s aus­ter­i­ty agen­da in the mid­dle of a glob­al reces­sion. That real­ly helped. Also, hav­ing the rest of the EU not go nuts and demand even more aus­ter­i­ty for years while Ger­many was breach­ing the EU bud­get rules also helped. So if Italy can just some­how reverse the glob­al down­turn and con­vince the rest of the EU to cut it some slack, Mr. Berg­er’s plan should do won­ders.

    Con­tin­u­ing...

    ...

    Record Unem­ploy­ment

    The Ital­ian econ­o­my shrank 0.1 per­cent in the first quar­ter before indus­tri­al pro­duc­tion returned to growth in April, the nation­al sta­tis­tics agency said June 10. Renzi’s been con­tend­ing with near-record unem­ploy­ment at 12.6 per­cent in April, and a steady decline in bank lend­ing to pri­vate-sec­tor busi­ness­es.

    Ren­zi isn’t afraid of con­flict and should take away the priv­i­leges of those who are in long-term jobs,” said Berg­er. “He has to elim­i­nate the divide of the labor mar­ket.”

    ...

    You have to love the sen­ti­ment at the end: “Ren­zi isn’t afraid of con­flict and should take away the priv­i­leges of those who are in long-term jobs...He has to elim­i­nate the divide of the labor mar­ket”. Because when there’s an income gap, the appro­pri­ate solu­tion is appar­ent­ly to ensure that every­one is screwed (except the folks at the top). That’s the ‘trick­le down’ way and it’s how eco­nom­ic har­mo­niza­tion is sup­posed take to the new EU: trick­ling down liv­ing stan­dards, trick­ling down tax­es on the rich, and trick­ling down reg­u­la­to­ry and labor pro­tec­tions until pros­per­i­ty takes hold. Forever.

    Posted by Pterrafractyl | June 16, 2014, 6:12 pm
  9. Watch out for falling pigs. Some of them may have start­ed fly­ing:

    Finan­cial Times

    July 21, 2014 6:05 pm
    Bun­des­bank shifts stance and backs unions’ push for big pay ris­es

    By Claire Jones in Frank­furt

    The Bun­des­bank has backed the push by Germany’s trade unions for infla­tion-bust­ing wage set­tle­ments, in a remark­able shift in stance from a cen­tral bank famed for its tough approach to keep­ing prices in check.

    Jens Ulbrich, the Bundesbank’s chief econ­o­mist, told Spiegel, a Ger­man week­ly, that recent­ly agreed pay ris­es of more than 3 per cent were wel­come, despite being above the Euro­pean Cen­tral Bank’s infla­tion tar­get of below but close to 2 per cent.

    In an arti­cle pub­lished on Sun­day, Mr Ulbrich said that recent wage trends were “mod­er­ate” giv­en Germany’s rel­a­tive eco­nom­ic strength and low lev­els of unem­ploy­ment. His com­ments echo the views of Jens Wei­d­mann, Bun­des­bank pres­i­dent, accord­ing to a senior cen­tral bank offi­cial.

    The push for high­er pay under­lines the height­ened con­cern among even the most hawk­ish mem­bers of the ECB’s gov­ern­ing coun­cil over the eurozone’s low infla­tion and signs that the region’s fledg­ling recov­ery is stalling. On Mon­day, the Bun­des­bank acknowl­edged the Ger­man econ­o­my was unlike­ly to have grown at all over the three months to June.

    The calls for high­er wages by Germany’s cen­tral bank high­light one of the most puz­zling conun­drums to befall the eurozone’s eco­nom­ic pow­er­house: why, despite record low unem­ploy­ment, the aver­age Ger­man worker’s wage has hard­ly risen over the past decade. The prob­lem is impor­tant for the region as a whole, as econ­o­mists view a pick-up in spend­ing by Ger­mans as a pre­req­ui­site of the eurozone’s econ­o­my return­ing to full strength.

    Ursu­la Enge­len-Kefer, a lec­tur­er at Hochschule der Bun­de­sagen­tur für Arbeit uni­ver­si­ty and for­mer deputy chair of DGB, Germany’s con­fed­er­a­tion of trade unions, said she was “flab­ber­gast­ed” by Mr Ulbrich’s remarks.

    “It goes to prove that even the cen­tral bank recog­nis­es that we can’t improve inter­nal eco­nom­ic growth with­out wages,” she added.

    Ste­fan Körzell, a mem­ber of the DGB’s board said, while the con­fed­er­a­tion was “pleased” by the Bundesbank’s move, trade unions had done well with­out the cen­tral bank’s advice in the past and would con­tin­ue to do so in the future.

    While Ger­man wage set­tle­ments this year were encour­ag­ing­ly strong, the cen­tral bank sig­nalled the trend must con­tin­ue if con­sumers in the eurozone’s largest econ­o­my are to pro­vide the lift to demand that is so des­per­ate­ly need­ed.

    Until now, the Ger­man cen­tral bank has backed only the most mod­est ris­es in pay, and has often object­ed to mea­sures to improve work­ers’ rights, includ­ing the planned intro­duc­tion of a min­i­mum wage and pro­pos­als to low­er the retire­ment age for employ­ees with more than 45 years in the labour mar­ket.

    The Bundesbank’s sup­port for faster wage growth in Ger­many is also the lat­est in a series of moves towards the main­stream of ECB think­ing. Mr Wei­d­mann has in the past found him­self in a minor­i­ty of one on the gov­ern­ing coun­cil, includ­ing when the ECB pledged to buy gov­ern­ment bonds of trou­bled coun­tries. In June, how­ev­er, the Bun­des­bank pres­i­dent backed the pack­age of excep­tion­al mea­sures which the ECB unveiled to stave off the threat of defla­tion.

    At 0.5 per cent, infla­tion remains lit­tle more than a quar­ter of the ECB’s tar­get.

    The weak­ness in price pres­sures in the euro­zone is part­ly a pos­i­tive devel­op­ment: it reflects an improve­ment in the com­pet­i­tive­ness of work­ers in the bloc’s periph­ery, where pro­duc­tiv­i­ty has tra­di­tion­al­ly lagged behind lev­els seen in economies such as Germany’s. How­ev­er, even in the region’s strongest economies infla­tion is below tar­get, with Ger­man prices ris­ing by just 1 per cent in the year to June.

    ...

    You have to love how the arti­cle points out at the end how “The weak­ness in price pres­sures in the euro­zone is part­ly a pos­i­tive devel­op­ment: it reflects an improve­ment in the com­pet­i­tive­ness of work­ers in the bloc’s periph­ery”, in an arti­cle about how a decade of lag­ging wage gains for Ger­man work­ers and was hold­ing back eco­nom­ic growth across the euro­zone. Still, this is cer­tain­ly a step in the right direc­tion. It’s been clear for some time that the only real cat­a­lyst for an improve­ment in the euro­zone poli­cies is, per­verse­ly, a decline in Ger­many’s eco­nom­ic per­for­mance that forced the Bun­des­bank to sup­port stim­u­la­tive mea­sures for the ECB as a whole that would oth­er­wise be protest­ed by Berlin. And now, with the Ger­man econ­o­my fac­ing low growth and near defla­tion, new poli­cies are final­ly on the way. Grant­ed, this new pol­i­cy is just tar­get­ing Ger­man work­ers, but rais­ing Ger­man wages and con­sump­tion was always going to have to be part of the solu­tion under the New Nor­mal of a cur­ren­cy union. So it’s a start. A much need­ed start:

    The Huff­in­g­ton Post

    Founder and chair­man, Berggru­en Hold­ings
    Ger­many Has the Most Unequal Dis­tri­b­u­tion of Wealth in the Euro­zone

    Nico­las Berggru­en
    Post­ed: 07/28/2014 1:14 pm EDT

    As a new Euro­pean Com­mis­sion pre­pares to set­tle into Brus­sels after the Euro­pean Par­lia­men­tary elec­tions, a new oppor­tu­ni­ty aris­es to address once again the cen­tral issue: Europe will only work for its cit­i­zens, and thus recov­er the legit­i­ma­cy of its grand project, if there is eco­nom­ic growth.

    This means three things:

    Above all, Europe needs to finance its cur­ren­cy with a com­mon fis­cal pol­i­cy. No com­mon cur­ren­cy has ever sur­vived with­out fis­cal inte­gra­tion. The euro is no dif­fer­ent.

    It also needs to invest in its future and not just dwell for­ev­er in the dol­drums of aus­ter­i­ty. Sim­ply, if one coun­try grows at the expense of oth­ers, Europe will not work. Con­verse­ly, any weak mem­ber will under­mine all oth­ers.

    Final­ly, the biggest econ­o­my, Ger­many, needs to con­sume more. For the aver­age Ger­man house­hold to improve its stan­dard of liv­ing, Ger­many can­not go on like Chi­na, just work­ing hard, export­ing and sav­ing.

    What does this imply prac­ti­cal­ly?

    ...

    - Ger­many needs to boost domes­tic con­sump­tion, for the good of its own cit­i­zens as well as Europe as a whole.

    As Paul De Grauwe and Yue­mei Ji point out in a recent study of the Euro­pean Cen­tral Bank’s house­hold wealth sur­vey, Ger­many has the most unequal dis­tri­b­u­tion of wealth in the euro­zone. They report that the medi­an house­hold in the top 20 per­cent of the income class has 74 times more wealth than the bot­tom 20 per­cent.

    That same ECB sur­vey showed that the net medi­an wealth of Ger­man house­holds was less than that of Bel­gium, Spain, Italy and France, among oth­ers. Yet wealth per capi­ta of GDP in Ger­many is high­er than any oth­er Euro­pean coun­try than the Nether­lands.

    This gap points out a key issue that is rarely dis­cussed despite its immense impli­ca­tions. As the De Grauwe/Ji study doc­u­ments, a large part of Ger­man wealth is not held by house­holds, but by the cor­po­rate sec­tor or the gov­ern­ment.

    In this sense, Ger­many faces the same chal­lenge as Chi­na: a high-export and sav­ing econ­o­my which needs to rebal­ance through poli­cies that cre­ate a greater flow of wealth to house­holds, thus spurring greater con­sump­tion. This, in turn, can cre­ate demand for imports from Ger­many’s Euro­pean neigh­bors.

    If Ger­many stands behind a new Euro­pean Com­mis­sion that press­es the agen­da out­lined above, it will ben­e­fit all Euro­peans — includ­ing ordi­nary Ger­mans. Only then will the Euro­pean Union begin to earn the legit­i­ma­cy it so sore­ly lacks today.

    Yes, Ger­many, the export-cen­tric mod­el coun­try that the rest of the euro­zone is cur­rent­ly tasked with emu­lat­ing, has an econ­o­my increas­ing­ly fac­ing the same chal­lenges as Chi­na. Is that the mod­el the euro­zone real­ly wants?

    Posted by Pterrafractyl | July 28, 2014, 12:12 pm
  10. Just in case any­one for­got who runs the euro­zone, here’s a reminder:

    UPDATE 1‑France urges ECB, Ger­many, to do more on growth and defla­tion risk

    Aug 4 (Reuters) — The Euro­pean Cen­tral Bank and Ger­many must do more to boost growth and fight a “real defla­tion­ary risk” in Europe, French Pres­i­dent Fran­cois Hol­lande told Le Monde dai­ly in an inter­view.

    Step­ping up recent French warn­ings that weak growth could make it dif­fi­cult for the gov­ern­ment to meet EU fis­cal tar­gets next year, Hol­lande said weak infla­tion made it all the hard­er for France.

    “Weak infla­tion too has neg­a­tive fis­cal con­se­quences on rev­enues as well as on debt. A lot will depend on the lev­el of the euro, which has weak­ened over the past few days but not enough,” Hol­lande said. “The ECB must take all nec­es­sary mea­sures to inject liq­uid­i­ty in the econ­o­my.”

    France has already received a two-year reprieve to bring its pub­lic deficit under 3 per­cent of GDP next year but the Euro­pean Com­mis­sion, the IMF and econ­o­mists polled by Reuters all fore­cast that it will miss the tar­get again next year.

    The gov­ern­ment has so far insist­ed it would ful­fill EU com­mit­ments but has had the same time repeat­ed­ly called its EU peers for “flex­i­bil­i­ty,” warn­ing that it would not go beyond its 50 bil­lion-euro pub­lic spend­ing cut plan for 2015–2017.

    Prime Min­is­ter Manuel Valls said on Fri­day the gov­ern­ment would give an update on the state of the econ­o­my “with­out hid­ing any­thing” after sec­ond quar­ter GDP data is pub­lished on Aug. 14.

    “We are not ask­ing for any lenien­cy from Ger­many but we are ask­ing it to do more to boost growth,” Hol­lande told Le Monde.

    “Its trade sur­plus and its finan­cial sit­u­a­tion allow it to invest more. That would be the best thing it could do for France and Europe.”

    Euro zone infla­tion fell in July to its low­est lev­el since the height of the finan­cial cri­sis near­ly five years ago, data showed on Thurs­day, high­light­ing defla­tion risks on the Euro­pean Cen­tral Bank’s radar.
    ...

    “We are not ask­ing for any lenien­cy from Ger­many but we are ask­ing it to do more to boost growth,” Hol­lande told Le Monde. It looks like France is learn­ing its place. For­tu­nate­ly for France and the rest of the euro­zone, the recent calls by the ECB and Bun­des­bank for high­er Ger­man wages might con­tribute to the over­all euro­zone econ­o­my and give the kind of much need­ed boost to the over­all infla­tion rate that Hol­lande was beg­ging for above. Of course, that assumes Ger­man busi­ness­es actu­al­ly agree with the call for high­er Ger­man wages and, of course, they don’t:

    Ger­man busi­ness­es rail against cen­tral bank high­er wage calls

    August 4th, 2014 06:03:45 GMT by Ryan Lit­tle­stone

    A report from Ger­many news­pa­per Han­dels­blatt says that a For­sa sur­vey of 502 busi­ness exec­u­tives shows an over­whelm­ing major­i­ty against high­er wagesk.

    62% of execs said that high­er wage set­tle­ments in Ger­many are not appro­pri­ate and 54% say that high­er wages would bring them greater dif­fi­cul­ties. 83% also said that the Bun­des­bank and ECB shouldn’t com­ment of wage poli­cies and col­lec­tive bar­gain­ing agree­ments.

    Ger­many has very low unem­ploy­ment with some areas hav­ing a job­less rate as low as 2.3%. In con­trast to oth­er Euro­pean coun­tries peo­ple can afford to pick and choose jobs.

    Recent­ly the Bun­des­bank sur­pris­ing­ly said it would be hap­py if wage infla­tion was to grow with pres­i­dent Jens Wei­d­mann say­ing;

    “It is to be wel­comed that wages and salaries are ris­ing more strong­ly than in the days when the Ger­man econ­o­my was in much poor­er shape. We have close to full employ­ment in a num­ber of sec­tors and regions. and are see­ing more and more reports of labour short­ages”

    It’s one avenue the Bun­des­bank are look­ing at to give infla­tion a lift and they, and the ECB, would like to see it spread across the Euro­zone in part to help tack­le low infla­tion.

    ...

    Posted by Pterrafractyl | August 4, 2014, 12:21 pm
  11. Giv­en the calls for end­less aus­ter­i­ty out of Berlin, one of the big ques­tions of the day is how long unions will be allowed to sur­vive as a major force in the Ger­man econ­o­my. While only time will tell the fate of Ger­many’s unions, here’s an arti­cle that strong­ly sug­gests time isn’t on their side:

    Bloomberg News
    Ger­many scru­ti­nized for side­step­ping unions, pay­rolls in hir­ing work­ers
    By Bir­git Jen­nen and Dorothee Tscham­pa, Bloomberg

    Octo­ber 24,2014, 11:20 PM

    BERLIN — Daim­ler is among Ger­man com­pa­nies that have found a way to cut per­son­nel costs in the high-wage coun­try: Buy labor as if it were paper clips.

    By pur­chas­ing cer­tain tasks such as logis­tics ser­vices from sub­con­trac­tors, busi­ness­es can legal­ly keep these work­ers off the pay­roll and out­side of wage agree­ments with unions. That’s led to grow­ing ranks of con­tract work­ers who help boost prof­it at Ger­man com­pa­nies by low­er­ing labor costs.

    The down­side is abuse of the sys­tem, which leaves some work­ers unpro­tect­ed and even unpaid. That’s caught the atten­tion of Labor Min­is­ter Andrea Nahles, who’s promis­ing a crack­down, and forc­ing Ger­many Inc. to defend the prac­tice.

    “We can’t pay every­one the high wage” in union deals, Wil­fried Porth, Daim­ler’s per­son­nel chief, said in an e‑mail to Bloomberg News. “Our cost sit­u­a­tion has dete­ri­o­rat­ed com­pared to the com­pe­ti­tion. We can’t afford that.”

    Pro­po­nents argue hir­ing sub­con­trac­tors to pro­vide ser­vices keeps Ger­many, where labor costs in the auto indus­try are the high­est in the world, com­pet­i­tive. Oppo­nents say the wide­spread prac­tice in indus­tries that include ship­build­ing, retail, logis­tics and con­struc­tion under­mines the Ger­man labor mod­el of a part­ner­ship between employ­ers and work­ers.

    Every third employ­ee in the Ger­man auto indus­try is work­ing either for a sub­con­trac­tor or as a tem­po­rary labor­er, accord­ing to a poll by IG Met­all union pub­lished last Novem­ber. Doing so has helped keep in check already high per­son­nel costs, which amount to 48.40 euros ($61.27) per hour on aver­age, accord­ing to the Berlin-based VDA auto indus­try group. This com­pares to 4.81 euros in Roma­nia and 25.63 euros in the U.S.

    What on the one hand helps retain Ger­man jobs and main­tain inter­na­tion­al com­pet­i­tive­ness, can also lead to the mis­use of work­ers, who have lit­tle recourse to pro­tect them­selves. Take the case of Ertz­ment Tsilin­gir from Greece, who this past sum­mer worked at a ship­yard close to Wis­mar in east­ern Ger­many.

    Tsilin­gir said he worked 10 hours a day, sev­en days a week, as a con­tract work­er and that, after near­ly two months liv­ing in a run-down shack, there was still no pay­check com­ing in.

    “We weren’t paid, we had hard­ly any­thing to eat and nobody seemed to care,” Tsilin­gir said in a tele­phone inter­view. He worked for a sub­con­trac­tor of a sub­con­trac­tor.

    Exam­ples like Tsilin­gir’s have stirred a wider debate in Ger­many about jobs being out­sourced into low­er paid con­tracts that often have less gen­er­ous over­time pay and few­er pro­vi­sions against fir­ing. Such agree­ments also bypass the pro­tec­tions employ­ees have where they are rep­re­sent­ed by a works coun­cil, which has seats on the com­pa­ny’s super­vi­so­ry board.

    “We see a trend toward a two-class labor force” divid­ing per­ma­nent and con­tract jobs, said Karl Brenke, a labor-mar­ket expert from Berlin-based research insti­tute DIW. “A grow­ing num­ber of con­tract jobs dis­solves the mod­el of employ­ee par­tic­i­pa­tion, which secured the social peace between com­pa­nies and employ­ees, and is a pil­lar of the Ger­man econ­o­my.”

    Nahles, whose Social Demo­c­ra­t­ic Par­ty is the junior part­ner in Chan­cel­lor Angela Merkel’s coali­tion gov­ern­ment, has pledged to tight­en rules regard­ing out­sourced work­ers. Doing so is part of the agree­ment that brought the Social Democ­rats into the gov­ern­ment.

    “We will address con­tract-work rela­tions next year,” Nahles said. “It’s dif­fi­cult to gath­er reli­able data,” which shows “trans­paren­cy should be key.”

    The Chris­t­ian Social Union, the Bavar­i­an sis­ter par­ty of Merkel’s CDU, is call­ing for putting off any changes for the time being to avoid adding an extra bur­den for indus­try as Europe’s largest econ­o­my flirts with reces­sion.

    “We need to ques­tion whether our coali­tion agree­ment, with regard to con­tract and tem­po­rary work rela­tions, is real­ly urgent­ly need­ed now,” Ger­da Has­selfeldt, cau­cus leader of the CSU par­lia­men­tary group, told reporters this month.

    Pre­cise num­bers on con­tract work are not avail­able because it’s paid for through pur­chas­ing bud­gets in the same way that met­al sup­plies are bought or a pro­duc­tion hall is built. There­fore, con­tract work­ers don’t appear in a com­pa­ny’s per­son­nel sta­tis­tics. The Fed­er­a­tion of Ger­man Trade Unions esti­mates that such posi­tions com­prise 20 per­cent of the work­force in some com­pa­nies.

    “Con­tract work is often used to under­mine pay agree­ments and work­ing hours, as well as social-secu­ri­ty stan­dards,” said Rein­er Hoff­mann, the trade union fed­er­a­tion’s chair­man.

    Gesamt­met­all — the employ­er orga­ni­za­tion for met­al and elec­tron­ic indus­tries whose mem­bers include Daim­ler, Siemens AG, Bay­erische Motoren Werke AG and ThyssenK­rupp AG — says con­tract work helps secure jobs in a sec­tor of the econ­o­my that employs 3.7 mil­lion peo­ple. Ger­many should­n’t throw out this flex­i­bil­i­ty because of a few bad eggs, the group says.

    “It’s wrong to say that con­tract work per se means that the work­ing con­di­tions for the employ­ees at the con­tract­ed firm are worse,” said Oliv­er Zan­der, Gesamt­met­al­l’s chief. “There might be some black sheep, but there are very few. In light of the hun­dreds of thou­sands of con­tracts that are arranged every day, we don’t see any need for action.”

    ...

    Well, it was pret­ty much inevitable that Ger­many’s unions were going to shrink giv­en Berlin’s unend­ing aus­ter­i­ty-onom­ics so we prob­a­bly should­n’t be sur­prised to see state­ments like this:

    “We see a trend toward a two-class labor force” divid­ing per­ma­nent and con­tract jobs, said Karl Brenke, a labor-mar­ket expert from Berlin-based research insti­tute DIW. “A grow­ing num­ber of con­tract jobs dis­solves the mod­el of employ­ee par­tic­i­pa­tion, which secured the social peace between com­pa­nies and employ­ees, and is a pil­lar of the Ger­man econ­o­my.”

    And nei­ther should we be sur­prised by the enthu­si­asm of Ger­many’s major employ­ers for non-union con­tract employ­ees or state­ments like, “it’s wrong to say that con­tract work per se means that the work­ing con­di­tions for the employ­ees at the con­tract­ed firm are worse”. LOL!

    What might be some­what sur­pris­ing, giv­en the strong pub­lic sup­port for unions, is the fact that union-bust­ing isn’t just some­thing on the minds of Ger­man employ­ers. Politi­cians are start­ing to feel like these unions are get­ting a lit­tle too pow­er­ful for com­fort, espe­cial­ly the small­er unions which have been call­ing a num­ber of strikes of late. So the politi­cians have a plan for deal­ing with these pesky small­er unions: restrict the small­er unions from nego­ti­at­ing their own wage deals with employ­ers:

    Bloomberg News
    Merkel Pro­pos­es Curb­ing Unions as Strikes Crip­ple Ger­many
    By Richard Weiss, Bir­git Jen­nen and Bri­an Parkin Oct 30, 2014 3:27 AM CT

    Ger­man Chan­cel­lor Angela Merkel is propos­ing curbs to union pow­er fol­low­ing walk­outs in recent months that have crip­pled the country’s trans­port net­work.

    Strikes this year by Deutsche Lufthansa AG (LHA) pilots have led to the can­cel­la­tion of 5,800 flights, while a series of walk­outs by Deutsche Bahn AG engi­neers have brought trains to a stand­still. Now, Merkel’s gov­ern­ment, in a pro­pos­al released this week, is push­ing to lim­it the role of small­er labor groups in wage nego­ti­a­tions.

    “We are observ­ing a ten­den­cy for strikes by small unions with big con­se­quences that result in many, many peo­ple suf­fer­ing,” Merkel told reporters. “We’ve made the deci­sion” to change the law to lim­it col­lec­tive-bar­gain­ing pow­er to one par­ty per busi­ness, she said.

    Even before this year’s strikes, which include walk­outs by Amazon.com Inc. (AMZN) work­ers, labor unrest in the coun­try has been ris­ing. The num­ber of com­pa­nies hit by indus­tri­al action soared in 2013 to 1,384, the high­est in two decades, accord­ing to data pub­lished by the Fed­er­al Labor Agency. While unions say they’re push­ing for pay gains to make up for stag­nat­ing house­hold incomes, com­pa­nies argue they can’t afford high­er wages as Europe’s biggest econ­o­my flirts with reces­sion.

    The strikes are “not help­ful giv­en the eco­nom­ic weak­ness,” said Thomas Har­jes, senior Euro­pean econ­o­mist at Bar­clays Plc in Frank­furt. Ger­many is “at a cross­roads,” and the right to strike must be exer­cised with pro­por­tion­al­i­ty and fair­ness, he said.

    Lim­it­ing Involve­ment

    The bill — draft­ed by Labor Min­is­ter Andrea Nahles, a Social Demo­c­rat and IG Met­all union mem­ber — wouldn’t direct­ly cur­tail strikes as such. Instead, her pro­pos­al would lim­it future wage talks to the biggest union for each group of employ­ees, poten­tial­ly curb­ing the role of small­er orga­ni­za­tions. The plan would also give courts more pow­er to inter­vene in labor dis­putes.

    “This is an inter­ven­tion against the right to strike and as such is uncon­sti­tu­tion­al,” Vere­ini­gung Cock­pit, which rep­re­sents Lufthansa pilots, said this week of the pro­posed law. This is about “break­ing the pow­er of small­er unions.”

    Small­er labor groups have increased their influ­ence in recent years fol­low­ing a 2010 court rul­ing allow­ing them to nego­ti­ate out­side the indus­try­wide agree­ments that have char­ac­ter­ized Germany’s wage deals.

    The GDL union, which is threat­en­ing more walk­outs at the nation­al rail­way, is locked in a bat­tle with com­peti­tor EVG to nego­ti­ate for train dri­vers. Both claim to be their main rep­re­sen­ta­tive.

    Abus­ing Rights

    The GDL is abus­ing strike rights by putting “its own inter­ests above the inter­ests of all work­ing staff at the rail­way,” said Ker­stin Griese, a Social Demo­c­rat and chair­woman of parliament’s labor com­mit­tee. The GDL “is not strik­ing for pay but com­pet­ing for pow­er with a rival union.”

    The Ver.di ser­vice union — which has staged a series of walk­outs at Amazon’s dis­tri­b­u­tion cen­ters, includ­ing one this week, to push for high­er wages and a col­lec­tive bar­gain­ing agree­ment — has also come out against the pro­pos­al say­ing that it “indi­rect­ly restricts” a union’s right to strike.

    The num­ber of Ger­man work­ers par­tic­i­pat­ing in walk­outs in 2013 stood at the high­est in five years, while work­ing days lost were the most in six years, accord­ing to Fed­er­al Labor Agency data. Unions argue rais­es are nec­es­sary because wages have been flat. Adjust­ed for infla­tion, house­hold income has not risen between 2006 and 2012, accord­ing to the Hans-Boeck­ler-Foun­da­tion, a labor-affil­i­at­ed orga­ni­za­tion.

    Prof­it Hit

    Lufthansa calls the government’s pro­posed changes a first step in the right direc­tion. The air­line has been hit with a num­ber of dis­rup­tions in the past three years, includ­ing from strikes by air traf­fic con­trollers, secu­ri­ty staff, fire fight­ers, apron staff and bag­gage han­dlers.

    ...

    So a lag­ging econ­o­my is now being used as an excuse to knee cap unions’ abil­i­ty to nego­ti­ate high­er wages in Ger­many. How con­ve­nient.

    Posted by Pterrafractyl | October 31, 2014, 11:49 am
  12. Josh Mar­shall has a piece that con­tains a lot of food for thought regard­ing how to the chal­lenges fac­ing poor and mid­dle-class Amer­i­cans are, to a large extent, tied to trends in glob­al­iza­tion that the US can’t real­ly change on its own: ris­ing pro­duc­tiv­i­ty tied to stag­nant wages, glob­al com­pe­ti­tion, and chang­ing tech­nol­o­gy that, tak­en togeth­er, places an unre­lent­ing pres­sure on the Amer­i­can work­er and work­ers all over the globle in one giant eco­nom­i­cal­ly-dis­em­pow­er­ing race to the bot­tom. And, as Mar­shall points out, nei­ther the the Democ­rats nor Repub­li­cans have real­ly demon­strat­ed a vision for address­ing the grow­ing strains of glob­al­iza­tion and yet the two par­ties aren’t equal­ly at risk. Why? Because no one real­ly expects the Repub­li­cans to come up with solu­tions that help the mid­dle class. The GOP’s brand is more of an ‘angry vent­ing’ par­ty than a ‘solu­tions’ par­ty. So, as Mar­shall puts it, one of the real long term prob­lems fac­ing the democ­rats isn’t just GOP obstruc­tion but also devel­op­ing a real, viable mod­el that does­n’t leave the mid­dle class an increas­ing­ly dis­em­pow­ered and shrink­ing demo­graph­ic in a chang­ing world and nei­ther par­ty has put forth real sub­stan­tive solu­tions to these socioe­co­nom­ic mega-meta-prob­lems:

    TPM Edi­tor’s Blog
    For­get the Chat­ter, This is the Democ­rats’ Real Prob­lem
    By Josh Mar­shall
    Pub­lished Novem­ber 10, 2014, 10:05 AM EST

    When a par­ty suf­fers a major set­back, every­one comes for­ward with their diag­no­sis of the prob­lem. And in most cas­es their diag­no­sis of the prob­lem tells us that the solu­tion is what the diag­noser want­ed to do more of in the first place. This is just human nature. We see the evi­dence before us as con­fir­ma­tion of what we already thought. When I’m asked these kinds of ques­tions, what I always say is that we should be high­ly skep­ti­cal of any­thing that sug­gests the answer is obvi­ous or sim­ple to exe­cute. Because for all the group­think and fol­ly and insu­lar think­ing of polit­i­cal pro­fes­sion­als, they’re gen­er­al­ly fair­ly bright and they have huge per­son­al and pro­fes­sion­al incen­tives to win. If it were real­ly that obvi­ous, some­one would have tried it already.

    I tend to agree that Democ­rats should have run more clear­ly on their eco­nom­ic record, though I do not think it would have been a game chang­ing move. And there are var­i­ous oth­er sup­posed errors that I agree were errors. But here are my two basic takes on what hap­pened.

    ...

    All of these things fit into the mix and oth­ers too. But I want to focus on some­thing that I don’t hear much talk about and which I think is a big cen­tral issue for Democ­rats going for­ward.

    Democ­rats have toyed (and I use that term advis­ed­ly) with the issue of ris­ing inequal­i­ty for the last two elec­tions. But let me sug­gest that as a polit­i­cal mat­ter inequal­i­ty is a los­er. What is dri­ving the pol­i­tics of the coun­try to a mam­moth degree is that the vast major­i­ty of peo­ple in the coun­try no longer have a ris­ing stan­dard of liv­ing. And Democ­rats don’t have a pol­i­cy pre­scrip­tion to make that change.

    Here is a chart we’ve prob­a­bly all seen some ver­sion of. The gist is that while pro­duc­tiv­i­ty growth has been rel­a­tive­ly con­sis­tent through the post-war peri­od, pro­duc­tiv­i­ty became unchained from wages in the ear­ly 1970s. Despite a mod­est bump up in the 90s and anoth­er small one in the aughts it’s real­ly nev­er come back.
    [see chart]

    Then there’s this chart (cour­tesy of The Upshot) show­ing the slow but nonethe­less steady decline of unem­ploy­ment since what was one of the great­est eco­nom­ic crises of the last hun­dred-plus years.

    My first chart only goes through 2010. But the gist is that wage growth has basi­cal­ly flat-lined since the cri­sis and Fri­day’s lat­est job num­bers show no signs of that chang­ing. Again, if you fol­low macro-eco­nom­ics you know all this stuff like the back of your hand. And when I say that this is the issue rather than ‘eco­nom­ic inequal­i­ty’, this is obvi­ous­ly one side of the equa­tion which is dri­ving ris­ing inequal­i­ty. You might even say this is the same thing, only expressed in a dif­fer­ent way. But it’s a crit­i­cal dif­fer­ence.

    Fun­da­men­tal­ly, most peo­ple don’t care par­tic­u­lar­ly how astro­nom­i­cal­ly wealthy peo­ple are liv­ing their lives. It is a dis­tant real­i­ty on many lev­els. They care a great deal about their own eco­nom­ic cir­cum­stances. And if you are not doing any bet­ter than you were 5 years ago or a decade ago or — at least in the sense of the hypo­thet­i­cal medi­an wage earn­er — 40 years ago, that’s going to real­ly have your atten­tion and shape a great deal of your world­view and polit­i­cal out­look.

    So, let me sign up with those who are say­ing that it was a mis­take not to run more clear­ly on the Pres­i­den­t’s (and the Democ­rats’) eco­nom­ic record. Unem­ploy­ment is back down to some­thing like nor­mal lev­els (under 6%); the deficit has fall­en con­sis­tent­ly and is now back to pre-crash lev­els judged as a per­cent­age of GDP (which is the only mean­ing­ful way to judge it); the stock mar­ket has done incred­i­bly well. Yes, total­ly.

    But here’s the thing: As long as most vot­ers are still just tread­ing water in their own eco­nom­ic lives, Repub­li­cans can say, “Oh yeah, they say the econ­o­my’s doing great with all their fan­cy num­bers. But that’s not what I see!” To an extent that will just be anoth­er Repub­li­can paean to innu­mer­a­cy. But it will res­onate because ris­ing employ­ment is not lead­ing to ris­ing wages. And that’s the core eco­nom­ic expe­ri­ence of wage earn­ers who make up the over­whelm­ing num­ber of peo­ple in the coun­try. In a crit­i­cal sense, it is true.

    So yes, run on the record. And at least at the mar­gins, make the argu­ment that in Europe they went down the aus­ter­i­ty path Repub­li­cans have pushed for and it’s been a dis­as­ter. No one real­ly ques­tions that any­more. But also rec­og­nize that the unchain­ing of wage growth from eco­nom­ic growth means the record isn’t real­ly that good, even though it could have and Repub­li­cans tried real­ly hard to make it much worse.

    Now, many Democ­rats look at all this and say this is way the par­ty needs to embrace eco­nom­ic pop­ulism whether of the Eliz­a­beth War­ren or Bernie Sanders vari­ety or who­ev­er else might be espous­ing it in more or less watered down ways. But I think this miss­es the point. The great polit­i­cal real­i­ty of our time is that Democ­rats don’t know (and nobody else does either) how to get wage growth and pro­duc­tiv­i­ty growth or eco­nom­ic growth lines back into sync.

    We know a fair amount about why they got out of sync. Decreased bar­gain­ing pow­er result­ing from the steep decline in the labor move­ment, a whole series of vast struc­tur­al changes in the econ­o­my we put under the head­ing of ‘glob­al­iza­tion’, rapid changes in tech­nol­o­gy which play a big role in the first two trans­for­ma­tions in my list and a bunch of oth­er things. What com­pli­cates the ques­tion is that at a cer­tain point eco­nom­ic trends that con­cen­trate wealth at the top mag­ni­fy them­selves as the win­ners use the polit­i­cal pow­er derived from that wealth to lock down and expand their gains.

    The key point for this dis­cus­sion is that these are not only changes that are glob­al in nature (hap­pen­ing almost every­where at once) they are also changes that seem to a sig­nif­i­cant degree to be tied to the accel­er­at­ing inte­gra­tion of glob­al economies. As you can see in the chart below, increas­ing con­cen­tra­tion of wealth at the top has hap­pened across the board in all indus­tri­al­ized coun­tries. But nowhere has the con­cen­tra­tion been more extreme than in the Unit­ed States, though notably, the top rivals are the UK and Cana­da which most close­ly mim­ic the US’s lais­sez-faire eco­nom­ic poli­cies.

    [see chart]

    But what are the poli­cies that would change this cor­ro­sive trend? And how do you run on them as a par­ty if you don’t know what they are? Min­i­mum wage increas­es help those at the very bot­tom of the income scale and they have a lift­ing effect up the wage scale as the floor gets pushed up. But it is at best a small part of the puz­zle. Clamp­ing down on tax dodges by the extreme­ly wealthy claws back some resources for the trea­sury and sends an impor­tant mes­sage, as might some restric­tions on ridicu­lous­ly high CEO pay. But again, these are impor­tant changes at the mar­gins that do not fun­da­men­tal­ly change the equa­tion. Eco­nom­ic pop­ulism or anoth­er com­pa­ra­ble pol­i­tics with a dif­fer­ent tonal­i­ty won’t get you very far if you can get beyond beat­ing up on the win­ners to pro­vid­ing con­crete improve­ments to those los­ing out in today’s econ­o­my.

    Again, a stark real­i­ty: Democ­rats don’t have a set of poli­cies to turn around this trend. Repub­li­cans don’t either, of course. But they don’t need to. Not in the same way. As a par­ty they are basi­cal­ly indif­fer­ent to mid­dle class wages. And their poli­cies stand to make the sit­u­a­tion even worse.

    I’m basi­cal­ly a semi-knowl­edgable out­sider to pub­lic pol­i­cy dis­cus­sions. And I know a bunch of peo­ple will come for­ward to say, wait there are a whole bunch of poli­cies we can and should be fol­low­ing. And before this seems like a total coun­sel of despair, I’m sure there are. But a few cau­tions. First, I don’t know many knowl­edgable peo­ple who have a lot of con­fi­dence that pub­lic pol­i­cy in the US can arrest or reverse changes that appear to be struc­tur­al and glob­al in nature. The right approach may be ger­mi­nat­ing in a think tank some­where. But which one?

    Sec­ond, poli­cies don’t exist in a vac­u­um. They need a pol­i­tics to sus­tain them. Tax cuts as an elixir for every prob­lem in the Amer­i­can body politic may be run­ning out of steam. But it was­n’t so potent because of its pol­i­cy mer­its, which haven’t made much sense for decades. It was potent because a gen­er­a­tion of activists and polit­i­cal­ly mind­ed peo­ple were reared on the idea and a vast polit­i­cal coali­tion was built around them. So find the poli­cies, if there are any, build a polit­i­cal coali­tion around them. And then, don’t for­get: the spi­ral­ing rates of wealth con­cen­tra­tion have cre­at­ed a polit­i­cal econ­o­my in which orga­nized wealth is extreme­ly well posi­tioned to beat back any chal­lenges to its gains.

    Believe it or not, I’m not a pes­simist on all this stuff. But you can­not make mid­dle class wage growth and wealth inequal­i­ty the cen­ter of your pol­i­tics unless you have a set of poli­cies which cred­i­bly claims some real shot at address­ing the prob­lem. At least not for long.

    As Mar­shall sug­gests, while income inequal­i­ty is cer­tain­ly an issue worth talk­ing about, it’s real­ly the fact employ­ee wages have been so stag­nant for so long that that’s real­ly going to moti­vate vot­ers. The same dynam­ics that cre­ate the immense income inequal­i­ty may also be sup­press­ing wages, but it’s the wage sup­pres­sion, and not the tow­er­ing CEO pay, that’s fun­da­men­tal­ly cre­at­ing the sim­mer­ing anger in the elec­torate. This is some­thing to keep in mind with 2016 now on the hori­zon: who­ev­er becomes the next pres­i­dent of the Unit­ed States is going to have to make a suc­cess­ful pitch to the Amer­i­can pub­lic for why they, as pres­i­dent, will end the race bot­tom. And if the Democ­rats can’t suc­cess­ful­ly make that pitch, the GOP’s ‘angry vent­ing’ brand appeal only increas­es.

    That’s all def­i­nite­ly some­thing to keep in mind with the GOP now anx­ious to give Pres­i­dent Oba­ma free trade “fast track” nego­ti­a­tion author­i­ty: no one real­ly expects the GOP to come up with solu­tions for the mid­dle class. That’s on the Democ­ra­t’s shoul­ders. And if the Democ­rats can’t come up with viable solu­tions the elec­torate will vote GOP just out of spite. And no one knows what those viable solu­tions are that the Democ­rats can get behind. Yet. And if vot­ers still don’t know what those viable solu­tions are in 2016 the Demo­c­ra­t­ic par­ty and the whole nation could have a major headache.

    With all that in mind, also note this fig­ure above show­ing the per­cent of income earned by the top 1% for a bas­ket of devel­oped nations. While the US is still clear­ly at the top of the pile in terms of hand­ing the most income over to the top 1%. But notice what the black line for Ger­many does in that chart: start­ing in 2005 the share of income going to Ger­many’s top 1% spikes from ~9% to almost 13% in just a few years. And that’s not a sur­prise since 2005 was the start of Ger­many’s much vaunt­ed “Agen­da 2010” aus­ter­i­ty agen­da that so many cred­it for Ger­many’s eco­nom­ic suc­cess­es (some­how the arti­fi­cial­ly deval­ued cur­ren­cy via the euro always gets ignored). That sharp spike in income going to the top 1% is some­thing that needs to be rec­og­nized because it’s the mod­el for what the rest of Europe and oth­er economies around the globe are sup­posed to do if every­one fol­lows the Ger­man aus­ter­i­ty mod­el to suc­cess: every­one gives the top 1% a big chunk of their pay­check in exchange for the promise of greater eco­nom­ic pros­per­i­ty. That mod­el is being pushed across Europe and it’s the mod­el the GOP clear­ly adheres to: A glob­al rat race to the bot­tom dri­ven by giv­ing the rich­est peo­ple on the plan­et even more mon­ey as part of an eco­nom­ic pro­tec­tion rack­et that does­n’t even offer pro­tec­tion. That aus­ter­i­ty mod­el is now a glob­al force that work­ers every­where need to deal with. And it’s the mod­el Democ­rats increas­ing­ly need to out com­pete going for­ward. You would­n’t think it would be all that hard to find a fair alter­na­tive to an abu­sive glob­al pro­tec­tion rack­et pyra­mid scheme but it’s clear­ly a real prob­lem.

    Posted by Pterrafractyl | November 11, 2014, 10:41 am
  13. When read­ing the fol­low­ing arti­cle, keep in mind that Angela Merkel’s CDU opposed the new Ger­man min­i­mum wage and it only became law after the SPD demand­ed it. So the num­ber of Ger­man work­ers liv­ing in pover­ty is prob­a­bly low­er than the hard­line econ­o­mists in Merkel gov­ern­ment(and its ide­o­log­i­cal allies) would pre­fer. And this is in Europe’s mod­el econ­o­my:

    Mil­lions of Ger­man work­ers in pover­ty

    More than three mil­lion Ger­mans can bare­ly make ends meet despite being in work, accord­ing to a Ger­man news­pa­per. Grow­ing num­bers of strug­gling work­ers are cut­ting back on heat­ing and food.

    Date 24.01.2015
    se/sb (AFP, epd)

    About 3.1 mil­lion wage and salary earn­ers in Ger­many had an income below the pover­ty thresh­old, accord­ing to Sat­ur­day’s edi­tion of the Saar­brück­er Zeitung news­pa­per.

    The paper cit­ed an overview from Ger­many’s Fed­er­al Sta­tis­ti­cal Office show­ing the most recent avail­able data, which cov­ered the year 2013. It also showed the num­bers of work­ers strug­gling to make ends meet jumped from about 2.5 mil­lion in 2008 — an increase of 25 per­cent in five years.

    Data, based on house­hold sur­veys, showed that those liv­ing on low wages were cut­ting back on food and heat­ing, among oth­er things, to save mon­ey. Accord­ing to a spe­cial analy­sis by the sta­tis­ti­cians, in 2013 some 538,000 low-wage work­ers were eat­ing a full meal only every sec­ond day in an effort to save mon­ey on food. About 417,000 were going with­out ade­quate heat­ing and almost 380,000 peo­ple could not afford to pay their rent on time.

    Every sec­ond low wage work­er, some 1.5 mil­lion Ger­mans, would not be able to pay for a one-week hol­i­day per year out­side their own four walls. About 600,000 work­ers were for­go­ing hav­ing their own car because they could not afford it.

    In the sur­vey, to be con­sid­ered as hav­ing an income below the pover­ty thresh­old, a per­son had to earn a total take-home pay, includ­ing state ben­e­fits like hous­ing or child sub­si­dies, of less than 60 per­cent of the medi­an wage. In the year 2013, this thresh­old was a month­ly take-home amount of 979 euros (about $1100) for an indi­vid­ual.

    “The num­ber of work­ers who earn scarce­ly or mar­gin­al­ly more than the gov­ern­ment unem­ploy­ment ben­e­fits (Hartz IV) is alarm­ing­ly high,” the pres­i­dent of the social asso­ci­a­tion VdK (VdK Sozialver­band) Ulrike Masch­er told the Saar­brück­er Zeitung.

    ...

    Remem­ber kids, you can’t have sus­tain­able pros­per­i­ty with­out the pover­ty required to sup­port it. Oth­er­wise wages would spi­ral into obliv­ion and every­one would become poor.

    In oth­er news, Greece just elect­ed Syriza into pow­er on an anti-aus­ter­i­ty plat­form, a day after ECB pres­i­dent Mario Draghi made it quite clear that the new ECB QE pro­gram is going to require a lot more “struc­tur­al reform” (more work­ing poor) if QE has any chance of work­ing and that means a lot more aus­ter­i­ty:

    Draghi says euro zone gov­ern­ments need to redou­ble reform efforts

    BERLIN Sat Jan 24, 2015 3:44am EST

    (Reuters) — Nation­al gov­ern­ments in the euro zone need to redou­ble their reform efforts to cre­ate a “gen­uine” eco­nom­ic union, ECB Mario Draghi wrote in a Ger­man mag­a­zine pub­lished on Sat­ur­day after the Euro­pean Cen­tral Bank’s bond-buy­ing pro­gramme was unveiled.

    In an advance text of a con­tri­bu­tion for the WirtschaftsWoche mag­a­zine, Draghi wrote the euro zone’s polit­i­cal union needs to be deep­ened. He said reforms were need­ed to raise com­pe­ti­tion, cut bureau­cra­cy and improve labour mar­ket flex­i­bil­i­ty.

    “By requir­ing gov­ern­ments in an eco­nom­ic union to under­take struc­tur­al reforms, they give cred­i­bil­i­ty (to the idea) that they can actu­al­ly over­come their debts through growth,” Draghi wrote.

    The ECB took launched a gov­ern­ment bond-buy­ing pro­gramme on Thurs­day that will pump hun­dreds of bil­lions in new mon­ey into a sag­ging euro zone econ­o­my. The ECB will buy sov­er­eign debt, despite oppo­si­tion from the Bun­des­bank and con­cerns in Berlin it could let spend­thrift coun­tries to slack­en eco­nom­ic reforms.

    ...

    “By requir­ing gov­ern­ments in an eco­nom­ic union to under­take struc­tur­al reforms, they give cred­i­bil­i­ty (to the idea) that they can actu­al­ly over­come their debts through growth”. Yes, just days after the ECB’s QE announce­ment we get Draghi still push­ing the ‘expan­sion­ary aus­ter­i­ty’ meme using a ‘con­fi­dence fairy’ jus­ti­fi­ca­tion. It lives. Or at least moves. Still.

    So Remem­ber kids: if the most eas­i­ly filled jobs in soci­ety, where work­ers have the least empow­er­ment, don’t come with the threat of pover­ty, your whole wage struc­ture will be hope­less­ly dis­tort­ed. Peo­ple will stop work­ing and soci­ety might col­lapse. Hope­ful­ly it won’t be that bad, but soci­etal col­lapse could total­ly hap­pen at any moment if work­ers aren’t in a per­pet­u­al race to the bot­tom. Don’t change hors­es in mid­stream.

    Posted by Pterrafractyl | January 25, 2015, 10:09 pm
  14. Oh great: So it looks like the SPD has already giv­en up any hope of win­ning in 2017, with the CDU now lead­ing the par­ty by 17 points in recent polls. Even worse, it’s feared by many in the SPD that the par­ty lead­ers’ plans for solv­ing this ‘iden­ti­ty cri­sis’ is to make the SPD even more right-wing. So the SPD’s Dr. Jekyll might be going on a LONG sab­bat­i­cal. The time for Mr. Hyde is here:

    The Irish Times
    Iden­ti­ty cri­sis grips Germany’s SPD as par­ty gives up on 2017 vic­to­ry
    Social Democ­rats’ inter­nal study warns of ‘grave image prob­lem’

    Derek Skally

    First pub­lished: Sat, Mar 14, 2015, 00:01

    Ger­many doesn’t go to the polls until 2017 but Social Demo­c­rat (SPD) leader Sig­mar Gabriel has already giv­en up hope of beat­ing Angela Merkel.

    At a “depress­ing” par­lia­men­tary par­ty meet­ing Mr Gabriel, eco­nom­ics min­is­ter in Berlin’s grand coali­tion, warned it would be a “long time” before Ger­many had anoth­er SPD chan­cel­lor.

    “Between [Merkel’s] Chris­t­ian Democ­rats, the [oppo­si­tion] Greens and Linke, that leaves us with a poten­tial of 27 per cent,” Mr Gabriel said, accord­ing to Der Spiegel.

    Since return­ing to office in Decem­ber 2013, the SPD has pushed through a min­i­mum wage of €8.50; low­ered the retire­ment age for work­ers after 40 years; and, last week, estab­lished a bind­ing 30 per cent quo­ta for women in board­rooms.

    But deliv­er­ing on its man­i­festo hasn’t halt­ed a five-point drop on its 2013 elec­tion result to just 24 per cent – 17 points behind the CDU. Now the par­ty is gripped by an iden­ti­ty cri­sis.

    After five years at the helm, Mr Gabriel is the longest-serv­ing SPD leader since the still ven­er­at­ed Willy Brandt. But he remains inde­ci­sive over the party’s core iden­ti­ty.

    He got his par­ty back into pow­er with a left-wing pro­gramme in 2013, but SPD left-wingers fear he plans to return to the Schröder-era niche in the polit­i­cal cen­tre – now occu­pied by Dr Merkel’s CDU.

    “We have to be the alter­na­tive to the CDU, not just a nicer ver­sion,” said Ralf Steg­n­er, a lead­ing SPD left-winger.

    Image prob­lem

    An inter­nal study warned of a “grave image prob­lem” and rec­om­mend­ed more fric­tion with its coali­tion part­ner to improve its pro­file. Not every­one thinks pick­ing rows with the CDU will be enough.

    “The SPD lacks a con­cept for now and for the future,” said Dr Gero Neuge­bauer, polit­i­cal sci­en­tist at Berlin’s Free Uni­ver­si­ty. “Nor can it offer vot­ers the promise of secu­ri­ty from the con­se­quences of glob­al­i­sa­tion.”

    ...

    The SPD has always ruled out work­ing with the suc­ces­sors to East Germany’s rul­ing SED, though that could change with the depar­ture of hard-line fig­ures such as Die Linke deputy leader Sahra Wagenknecht.

    But her leav­ing did noth­ing to address anoth­er prob­lem, said Dr Neuge­bauer: “Ger­man soci­ety is shift­ing right.”

    So that was awful to read. Let’s at least hope Dr. Jekyll does some read­ing while he’s away. Maybe he could devel­op some ideas for the future of the SPD that are actu­al­ly help­ful.

    Jacobin
    End­ing the Creditor’s Par­adise

    What would you tell six hun­dred lead­ing Ger­man social democ­rats about their party’s han­dling of the Euro­cri­sis?
    by Mark Blyth

    2.27.15

    Mark Blyth is the East­man pro­fes­sor of polit­i­cal econ­o­my at Brown Uni­ver­si­ty and the author of Aus­ter­i­ty: The His­to­ry of a Dan­ger­ous Idea .

    What would you tell six hun­dred lead­ing Ger­man social democ­rats about their party’s han­dling of the Euro­cri­sis?
    by Mark Blyth

    As I sat in my office at Brown Uni­ver­si­ty on Decem­ber 16, 2014, an email popped into my inbox with the title “Her­zlichen Glück­wun­sch – Sie sind der 1. Preisträger des Hans-Matthöfer-Preis­es für wirtschaft­spub­lizis­tik.” This was the award giv­en by the Friedrich Ebert Stiftung (FES), the research foun­da­tion clos­est to the Ger­man Social Demo­c­ra­t­ic Par­ty (SPD), and the Hans-Matthöfer Stiftung for the best eco­nom­ics pub­li­ca­tion in Ger­man in 2014. I was, to say the least, sur­prised.

    My 2013 Oxford Uni­ver­si­ty Press book, Aus­ter­i­ty: The His­to­ry of a Dan­ger­ous Idea, had recent­ly been trans­lat­ed into Ger­man by the pub­lish­ing arm of the FES. Indeed, I had been there a month ear­li­er, in Berlin, to do a book launch, which was very well attend­ed. Since then the book has been reviewed, pos­i­tive­ly, in the Ger­man press, with Sud­deutsche Zeitung giv­ing it a rather glow­ing review. Some­thing odd was going on.

    Clear­ly, despite the impres­sion we get in the US, there was move­ment away from the “aus­ter­i­ty is the only way” approach to think­ing about the euro­zone cri­sis in Berlin, at least among the social democ­rats — but how much move­ment?

    Con­sid­er that dur­ing the nego­ti­a­tions to form the cur­rent coali­tion with Ger­man Chan­cel­lor Angela Merkel’s Chris­t­ian Demo­c­ra­t­ic Union, the SPD could have made an issue out of how the poli­cies designed to heal Europe were caus­ing great harm, a fact acknowl­edged even by the Inter­na­tion­al Mon­e­tary Fund by 2012. But they chose not to do so.

    True, as Ger­man (and French) politi­cians know only too well, there are no votes in talk­ing about Europe, only costs, so not speak­ing up is local­ly ratio­nal. But not speak­ing up when such inap­pro­pri­ate poli­cies are being applied to Germany’s Euro­pean part­ners is col­lec­tive­ly dis­as­trous. Indeed, what is so trag­ic in this cri­sis is how the cen­ter-left through­out Europe have not just accept­ed, but in many cas­es active­ly sup­port­ed, poli­cies that have done noth­ing but hurt their sup­posed core con­stituen­cies.

    So I was award­ed the prize at a cer­e­mo­ny in Berlin for “think­ing dif­fer­ent­ly” about eco­nom­ics. Mar­tin Schultz, the head of the Euro­pean Par­lia­ment, gave the intro­duc­tion. Peter Bofin­ger, the voice of macro­eco­nom­ic rea­son on the Ger­man equiv­a­lent to the US Coun­cil of Eco­nom­ic Advi­sors, gave a speech prais­ing the book. I had ten min­utes to say some­thing use­ful at the end of the event. But what should I say that would be of use to the six hun­dred social democ­rats gath­ered in the room?

    I had just been there a month before, giv­ing the mes­sage of the book, and I didn’t want to do that again. I want­ed to be use­ful, and sup­port­ive of this shift in think­ing. But I also want­ed to remind the SPD of who they are sup­posed to be and whom they are sup­posed to defend. I hope this was how the fol­low­ing was received.

    It is both an hon­or and an irony to stand here today and receive the 2014 Hans-Matthöfer-Preis für Wirtschaft­spub­lizis­tik. The hon­or is to be rec­og­nized at all, giv­en the com­pe­ti­tion. To name but a few of my fel­low con­tenders, Thomas Piket­ty may be my favorite econ­o­mist, and Wolf­gang Mun­chau may be my favorite jour­nal­ist, so to be rec­og­nized amongst them is an hon­or.

    But it is also some­what iron­ic to be so rec­og­nized in the one coun­try that seems, at least at the elite lev­el, utter­ly imper­vi­ous to the mes­sage of the book that you are rec­og­niz­ing this evening. Per­haps at least in this room, and among social democ­rats, that mes­sage is gain­ing strength.

    Aus­ter­i­ty as eco­nom­ic pol­i­cy sim­ply doesn’t work. In the cas­es where it looked like it worked, some­thing else was real­ly doing the work, usu­al­ly the deval­u­a­tion of a sov­er­eign cur­ren­cy at the same time as the expan­sion of a much larg­er trad­ing part­ner gave exports a short-term boost. Bud­gets were cut as exports expand­ed, but it wasn’t the cuts that mat­tered, it was the expan­sion.

    But I have stood here before and spo­ken about Aus­ter­i­ty, so let’s take the few min­utes we have here today to look for­ward rather than back­wards.

    All eyes are on Greece and the pos­si­bil­i­ty of default or “Grex­it” Indeed, it’s an impos­si­ble posi­tion for all sides. The Greeks can­not pay back what they owe, giv­en that the poli­cies enact­ed to help them grow have result­ed in the col­lapse of near­ly a third of their econ­o­my. The young and the tal­ent­ed have left, leav­ing pen­sion­ers and the pub­lic sec­tor behind.

    But to rec­og­nize that fact and accom­mo­date pol­i­cy opens up issues in debtor coun­tries such as Ire­land and Por­tu­gal and Spain that cred­i­tor coun­tries such as Ger­many do not want to deal with.

    So how do we move for­ward, and what is the role of a social-demo­c­ra­t­ic par­ty in shap­ing this path? Two issues stand out for me. The first is what I refer to in Aus­ter­i­ty as “the false promise of struc­tur­al reform.” There can be no doubt that the debtor coun­tries of Europe need major reforms in tax­a­tion sys­tems, labor mar­kets, busi­ness reg­u­la­tion, and a host of oth­er areas.

    But…

    1. When we say “struc­tur­al reform” we real­ly have no idea what those words actu­al­ly mean, and we often fall back on them as a back-hand­ed acknowl­edg­ment that aus­ter­i­ty has failed, or

    2. We mis­un­der­stand what we did when we refer to pri­or episodes of struc­tur­al reform, and there­by miss that it is impos­si­ble for any­one else to do what we once did.

    Let me explain. “Struc­tur­al reform” used to be called “struc­tur­al adjust­ment.” And Euro­pean left­ies like us used to con­demn it as absurd, ridicu­lous, “neolib­er­al­ism gone mad” — and yet we seem quite hap­py to unleash these poli­cies, despite the dam­age that they have done in the devel­op­ing world, upon our Euro­pean part­ners.

    When you ask for the con­tent of what struc­tur­al reform means, it seems to be a check­list of low­er tax­es, dereg­u­late every­thing in sight, pri­va­tize any­thing not nailed down, and hope for the best. But are these poli­cies not dis­turbing­ly Amer­i­can, if not Thatcherite? Indeed, isn’t this every­thing that the SPD is sup­posed to be against, and much of which the Ger­man pub­lic would nev­er put up with?

    Euro­pean reforms take the more sub­tle cov­er of sim­ply ask­ing every­one to become “more com­pet­i­tive” — and who could be against that? Until one remem­bers that being com­pet­i­tive against each other’s main trad­ing part­ners in the same cur­ren­cy union gen­er­ates a “mov­ing aver­age” prob­lem of con­ti­nen­tal pro­por­tions.

    It is sta­tis­ti­cal­ly absurd to all become more com­pet­i­tive. It’s like every­one try­ing to be above aver­age. It sounds like a good idea until we think about the intel­li­gence of the chil­dren in a class­room. By def­i­n­i­tion, some­one has to be the “not bright” one, even in a class of genius­es.

    But some­thing has to be done, and we are often told that Ger­many was the “sick man” of Europe, that the coun­try took the “bit­ter med­i­cine” of the Hartz reforms and became more com­pet­i­tive. Because of this, when the cri­sis hit, Ger­many sur­vived and came back stronger. The con­clu­sion that fol­lows — the rest of Europe needs to embrace “struc­tur­al reform” — quick­ly fol­lows.

    This is a pop­u­lar sto­ry, but it’s quite wrong, and its appli­ca­tion to oth­er coun­tries rests upon a rather obvi­ous mis­read­ing of recent Ger­man his­to­ry. Chris­t­ian Dust­mann and his col­leagues have exam­ined this ques­tion in depth and con­clud­ed that what real­ly made the Ger­man econ­o­my more com­pet­i­tive were three inter­re­lat­ed phe­nom­e­na that hap­pened a decade before Hartz.

    First, and I know all about this being mar­ried into a fam­i­ly of East Ger­mans, was reuni­fi­ca­tion. Hav­ing ten mil­lion extra work­ers sud­den­ly enter the labor mar­ket puts mas­sive down­ward pres­sure on wages that begins to show up around 1994.

    Sec­ond, mov­ing parts sup­pli­ers for the Ger­man Auto com­plex out to the for­mer east­ern bloc coun­tries makes the inputs for Ger­man exports even more com­pet­i­tive. This starts around the same time.

    Third, Ger­man unions, at the same time, real­ize that glob­al­iza­tion starts east of the Elbe and sim­ply stop ask­ing for wage increas­es. The com­bined result is a squeeze on wages that lasts for near­ly twen­ty years that is masked by the trans­fers of the wel­fare sys­tem. This is where your com­pet­i­tive­ness comes from.

    What Hartz does, a decade lat­er, is remove young sin­gle peo­ple from the wel­fare rolls and places them in mini jobs. The result of this is an expan­sion of the shel­tered ser­vice sec­tor, and of chron­ic low pay, that has to be addressed years lat­er by the intro­duc­tion of a min­i­mum wage. Indeed, almost all the jobs cre­at­ed by Hartz are low-pro­duc­tiv­i­ty, shel­tered ser­vice sec­tor jobs.

    The export sec­tor, the “com­pet­i­tive” part of the econ­o­my, depends upon demand gen­er­at­ed else­where in the world, and it con­tin­ues to shed, not add jobs, as cap­i­tal sub­sti­tutes for labor in high-skilled pro­duc­tion.

    If Dust­mann et al. are cor­rect, and I think that they are, then the abil­i­ty to trans­fer these lessons to oth­er coun­tries is zero. No one else has an East Ger­many wait­ing around the cor­ner to push down labor costs, and even if every­one did, all that would do is reduce con­sump­tion in the aggre­gate, there­by impov­er­ish­ing every­one.

    The take home les­son is per­haps then that Ger­many is only Ger­many because every­one else is “not Ger­many.” To try and make every­one a bit more like Ger­many can only mean the expan­sion of a poor­ly paid ser­vice sec­tor and the intro­duc­tion of a min­i­mum wage to com­pen­sate. I do not think that’s what struc­tur­al reform advo­cates rec­om­mend, but it’s where we may end up.

    My sec­ond point returns us to the notion that we have grown quite com­fort­able talk­ing about “cred­i­tor nations” and “debtor nations,” rather than “Euro­pean nations,” as if being a debtor or a cred­i­tor is a nation­al char­ac­ter­is­tic. Indeed, one of the most poi­so­nous aspects of this peri­od and pol­i­cy of aus­ter­i­ty is the dis­course it pro­duces that reduces com­plex for­ma­tions of class and insti­tu­tions to essen­tials of race and iden­ti­ty.

    But look beyond this, and there is a big­ger issue for left par­ties to deal with, one that they unfor­tu­nate­ly helped to cre­ate. Back in the 1970s, a peri­od that now seems quite benign, cor­po­rate prof­its were very low, labor’s share of income was very high, and infla­tion was ris­ing. We were told that this was unsus­tain­able, and new insti­tu­tions and poli­cies were con­struct­ed to make sure that this par­tic­u­lar mix of out­comes would nev­er hap­pen again.

    In this regard we were sin­gu­lar­ly suc­cess­ful. Today, cor­po­rate prof­its have nev­er been high­er, labor’s share of nation­al income has almost nev­er been low­er, and infla­tion has giv­en way to defla­tion. So are we hap­pi­er for this change?

    What we have done over the past thir­ty years is to build a creditor’s par­adise of pos­i­tive real inter­est rates, low infla­tion, open mar­kets, beat­en-down unions, and a retreat­ing state — all policed by unelect­ed eco­nom­ic offi­cials in cen­tral banks and oth­er unelect­ed insti­tu­tions that have only one tar­get: to keep such a creditor’s par­adise going.

    In such a world, why would you, the aver­age work­er, ever get a pay rise? Indeed, is it any won­der that inequal­i­ty is every­where an issue? In Europe this plays out at the nation­al lev­el, and at the inter­na­tion­al lev­el of cred­i­tor coun­tries (good) and debtor coun­tries (bad), where the rights of the cred­i­tors must be pro­tect­ed and the mantra that “you must pay your debts” must be respect­ed.

    Yet even in terms of sim­ple wel­fare eco­nom­ics, this is non­sense. If the cost of squeez­ing the debtor is to keep her in debt servi­tude, or if the loss­es to the cred­i­tors are less than the costs of ser­vic­ing the debt in per­pe­tu­ity, then default is effi­cient, if not moral.

    Today it is a pro­found irony that Euro­pean social democ­rats wor­ry deeply, as they should, about the investor pro­tec­tion claus­es embed­ded in the pro­posed Transat­lantic Invest­ment Treaty with the US, and yet they demand enforce­ment of exact­ly the same cred­i­tor pro­tec­tions on their fel­low Euro­peans with­out paus­ing for breath for the mon­ey they “lent” to them to bail out their own bank­ing sys­tems’ errant lend­ing deci­sions.

    Some­thing has gone bad­ly wrong when social democ­ra­cy thinks this is OK. It is not. Because it begs the fun­da­men­tal ques­tion, “what are you for — if you are for this?” The Ger­man Social Democ­rats, for we are all the heirs of Rosa Lux­em­burg, today stand as the joint enforcers of a creditor’s par­adise. Is that who you real­ly want to be? Mod­ern Euro­pean his­to­ry has turned many times on the choic­es of the SPD. This is one of those moments.

    ...

    Look at what you’ve become SPD, look at what you’ve become!

    What we have done over the past thir­ty years is to build a creditor’s par­adise of pos­i­tive real inter­est rates, low infla­tion, open mar­kets, beat­en-down unions, and a retreat­ing state — all policed by unelect­ed eco­nom­ic offi­cials in cen­tral banks and oth­er unelect­ed insti­tu­tions that have only one tar­get: to keep such a creditor’s par­adise going.

    ...

    Today it is a pro­found irony that Euro­pean social democ­rats wor­ry deeply, as they should, about the investor pro­tec­tion claus­es embed­ded in the pro­posed Transat­lantic Invest­ment Treaty with the US, and yet they demand enforce­ment of exact­ly the same cred­i­tor pro­tec­tions on their fel­low Euro­peans with­out paus­ing for breath for the mon­ey they “lent” to them to bail out their own bank­ing sys­tems’ errant lend­ing deci­sions.

    Put the eco­nom­ic mad sci­ence away SPD. PLEASE. It’s going to destroy you. And oth­ers.

    Posted by Pterrafractyl | March 18, 2015, 5:57 pm
  15. Here’s a reminder that ‘the mar­ket’ would slit its own wrists if you pay it enough. Or, more pre­cise­ly, here’s a reminder that ‘the mar­ket’ is cur­rent­ly in the process of slit­ting its own wrists because it’s real­ly prof­itable these days:

    Japan­ese work­ers get small­er share of cor­po­rate earn­ings despite record prof­its

    GRAPHIC: Work­ers’ share of cor­po­rate earn­ings: link.reuters.com/muw24w By Tet­sushi Kaji­mo­to TOKYO, March 4 (Reuters) — Mil­lions of Japan­ese work­ers are tak­ing home their small­est share of cor­po­rate income in two decades as com­pa­nies build record cash hoards and abstain from sub­stan­tial wage rais­es seen by Prime Min­is­ter Shin­zo Abe as crit­i­cal to a durable eco­nom­ic recov­ery.

    A sea­son­al­ly adjust­ed esti­mate by the inde­pen­dent NLI Research Insti­tute shows work­er com­pen­sa­tion fell as a per­cent­age of cor­po­rate income in 2014 to the low­est lev­el since 1991. By con­trast, com­pa­nies piled up 332 tril­lion yen ($2.75 tril­lion) in inter­nal reserves as of the end of last year on the back of record prof­its while increas­ing the num­ber of low-paid, non-reg­u­lar jobs to curb fixed per­son­nel costs.

    ...

    Although Japan’s econ­o­my emerged from reces­sion in the last quar­ter of 2014, many com­pa­nies are look­ing for signs of sus­tained eco­nom­ic growth before com­mit­ting to a deci­sion to raise salaries. Labour union­ists are seek­ing much high­er salary increas­es this year as they meet with their employ­ers dur­ing the so-called “shunto”, or annu­al wage nego­ti­a­tions, this month. Ana­lysts warn that cau­tion about rais­ing wages could cre­ate a vicious cycle of shrink­ing domes­tic demand and dimin­ished eco­nom­ic growth prospects.

    “Unless wages are raised in a sus­tain­able way, domes­tic demand and con­sump­tion will con­tin­ue to lan­guish, pre­vent­ing com­pa­nies from find­ing prof­it oppor­tu­ni­ties at home,” said Taro Saito, direc­tor of eco­nom­ic research at NLI Research Insti­tute.

    Ok, so to review:
    Japan­ese work­er com­pen­sa­tion as a per­cent­age of cor­po­rate income to the low­est lev­el since 1991, com­pa­nies are sit­ting on grow­ing piles of cash and record prof­its, a grow­ing per­cent­age of the work­force is low-paid and work­ing in non-reg­u­lar jobs, and the ana­lysts that com­piled this report are warn­ing that if Japan­ese com­pa­nies don’t start rais­ing wages they might cre­ate a vicious cycle of shrink­ing domes­tic demand. But the com­pa­nies are wait­ing for more signs of sus­tained eco­nom­ic growth before rais­es will be con­sid­ered.

    In oth­er news...

    Ger­man employ­ers get cre­ative to skirt new min­i­mum wage
    BERLIN | By Michelle Mar­tin
    Odd­ly | Thu Mar 12, 2015 3:51pm EDT

    (Reuters) — From charg­ing slaugh­ter­house work­ers for their knives to com­pen­sat­ing staff with tan­ning salon vouch­ers, Ger­man employ­ers are com­ing up with cre­ative ways to avoid pay­ing a new min­i­mum wage, anger­ing unions.

    Chan­cel­lor Angela Merkel’s gov­ern­ment intro­duced Ger­many’s first nation­wide wage floor of 8.50 euros per hour ear­ly this year. The law was the brain­child of the Social Democ­rats (SPD), who made it a con­di­tion of join­ing Merkel’s coali­tion in 2013.

    The cen­tre-left par­ty argued that it was a nec­es­sary response to the sharp rise in low-wage jobs over the past decade. Some 3.7 mil­lion peo­ple were expect­ed to ben­e­fit.

    But in the months since it went into effect it has become clear that not every­one is tak­ing home more pay. The NGG food and cater­ing union is field­ing up to 400 calls a day from peo­ple who say their employ­ers are find­ing ways to cir­cum­vent the law.

    “We’re see­ing some employ­ers dis­play an awful lot of cre­ativ­i­ty to get round pay­ing the min­i­mum wage,” Burkhard Siebert of the NGG said.

    He said some work­ers were no longer get­ting paid for over­time. Oth­ers are being charged for drinks and cloth­ing they are required to wear on the job.

    Ger­man Labour Min­is­ter Andrea Nahles has admit­ted to imple­men­ta­tion prob­lems but said she had not yet heard any­thing to sug­gest the law may need to be changed. The far-left Linke par­ty say it was “botched” and con­tains too many loop­holes.

    Butch­ers have com­plained that they must pay a fee of up to 100 euros per month to use knives they need to cut meat. Bak­ers say they are being paid in buns and bread instead of cash.

    Bernd Bischoff, who runs an advice cen­ter for con­trac­tors in the city of Old­en­burg, said the meat indus­try was espe­cial­ly affect­ed. Work­ers from south­east Europe were being charged more for accom­mo­da­tion to off­set the cost of high­er wages.

    Last week a sur­vey by poll­ster Infrat­est dimap showed 15 per­cent of Ger­mans had heard about employ­ers side­step­ping the min­i­mum wage from friends and fam­i­ly. Some 3 per­cent said they were direct­ly affect­ed.

    Among them is 66-year-old Juer­gen Schlu­ens, who used to earn around 6.30 euros per hour deliv­er­ing papers in the vil­lage of Witz­wort close to the North Sea.

    Once the new wage law took effect, he says his boss reduced the pre­mi­um he received for start­ing work at 4.45 a.m. and demand­ed that he get the job done in half the time.

    “The min­i­mum wage of 8.50 euros per hour was paid on paper but my boss said I could only take 52 min­utes to do my round,” he told Reuters. “I need­ed about 94 min­utes — and I should know as I’ve been doing the job for near­ly 11 years.”

    ...

    Unions report cas­es of bak­eries, a solar­i­um and a gym giv­ing staff coupons to use on site rather than pay­ing the min­i­mum wage. A bak­er who refused such an offer was told to give the vouch­ers to her hus­band, the NGG said.

    Oth­er work­ers have had their hol­i­day enti­tle­ment reduced or pre­mi­ums for work­ing nights, hol­i­days and Sun­days slashed.

    ...

    Yes, Ger­many’s new min­i­mum wage is also too much for employ­ers to han­dle dur­ing a peri­od of record low unem­ploy­ment and now employ­ers are ‘get­ting cre­ative’.

    It’s all a reminder that, with cor­po­rate prof­its at records around the globe and a num­ber of major free-trade agree­ments under con­sid­er­a­tion, the most potent ‘trade’ agree­ment for increas­ing glob­al trade and over­all eco­nom­ic activ­i­ty would be an agree­ment that has noth­ing to do with low­er­ing trade bar­ri­ers but instead is sim­ply an agree­ment to tax the s#@t out of all these cor­po­rate giants with record prof­its and mas­sive cash piles and then just hav­ing the gov­ern­ment cut use to the pro­ceeds to every­one a check! An inter­na­tion­al Robin Hood agree­ment to help every­one, rich and poor alike! It would be like the already pro­posed “Robin Hood tax/Tobin tax”, except you would specif­i­cal­ly tar­get the cash piles and every­one would just get a check from the pro­ceeds instead. The poor get cash and the rich get to avoid actu­al­ly com­ing to see­ing the sys­tem that made them rich col­lapse under the weight of its own inter­nal con­tra­dic­tions. They just get taxed instead. It’s win-win!

    Of course, for this scheme to work you would have to get a lot of each nation’s major trad­ing part­ners on board but that’s already hap­pened with the TPP and TPIP so it’s not like it’s impos­si­ble. Maybe the UN could play a role? And when the cor­po­ra­tions inevitably com­plain about how unfair it is, all we have to do is point to the record prof­its, decades of stag­nant wages, and decades of hear­ing about how glob­al com­pe­ti­tion forced the sup­pres­sion of those wages and then point out that rais­ing tax­es on all the major exporters simul­ta­ne­ous­ly isn’t going to put any­one at a rel­a­tive dis­ad­van­tage. And then we give them the stink eye.

    Posted by Pterrafractyl | May 6, 2015, 3:14 pm
  16. The CEO of Air­bus just gave a help­ful tip to the Ger­man gov­ern­ment over how to incor­po­rate the flood of refugees into the Ger­man soci­ety: dereg­u­late the labor mar­ket and get rid of the min­i­mum for the refugees so they can be put to work doing low-paid mini-jobs:

    Reuters
    Air­bus boss calls on Ger­many to open up labour mar­ket to refugees

    BERLIN

    Sun Oct 25, 2015 4:15pm GMT

    Ger­many should dereg­u­late its labour mar­ket and cre­ate more low­er-paid jobs to help refugees find work and inte­grate bet­ter into soci­ety, the head of Europe’s largest aero­space group Air­bus (AIR.PA) said on Sun­day.

    Ger­many expects at least 800,000 migrants to arrive this year alone, almost 1 per­cent of the pop­u­la­tion, many of them flee­ing con­flicts in Syr­ia and else­where. Politi­cians and econ­o­mists have warned the influx will push up unem­ploy­ment in Europe’s biggest econ­o­my.

    “We must have the courage for dereg­u­la­tion in the way that so far we know from the Unit­ed States,” Tom Enders, a Ger­man, wrote in a com­men­tary for the Sued­deutsche news­pa­per.

    “That seems hard to imag­ine. But there, you see a suc­cess­ful inte­gra­tion of migrants who are allowed to work soon after they arrive,” he wrote.
    h
    Ger­many should make excep­tions for the min­i­mum wage and offer more flex­i­bil­i­ty with short-term con­tracts, he said.

    “If the thresh­old for entry into the labour mar­ket is too high, the inte­gra­tion of immi­grants in soci­ety will fail,” Enders wrote.

    “It is bet­ter to enter the labour mar­ket with mini-jobs or low-paid jobs than not at all and to be con­demned to social secu­ri­ty, doing noth­ing and frus­tra­tion.”

    Some econ­o­mists have argued that the influx of migrants could pro­vide skilled labour, espe­cial­ly in some areas where there are short­ages such as engi­neer­ing, and boost eco­nom­ic growth.

    While it’s cer­tain­ly true that tak­ing in 800,000 refugees, 1 per­cent of Ger­many’s pop­u­la­tion, was­n’t going to be easy, it’s dif­fi­cult to think of a pol­i­cy that’s going to be more like­ly to exac­er­bate grow­ing xeno­pho­bia than a sud­den dereg­u­late of labor laws so com­pa­nies like Air­bus can employ all those refugees in below-min­i­mum wage jobs...just like the US does (to its undoc­u­ment­ed immi­grants that lack labor pro­tec­tions). What a help­ful sug­ges­tion!

    Posted by Pterrafractyl | October 27, 2015, 8:16 pm
  17. With Angela Merkel run­ning still pos­si­bly run­ning for reelec­tion in 2017, here’s a reminder that the direct and indi­rect con­se­quences of the eco­nom­ic dev­as­ta­tion imposed on Euro­pean soci­ety, in par­tic­u­lar Ger­man soci­ety, pre­lude to what could end up being a major issue in Ger­many’s 2017 elec­tions: Ger­man elder­ly pover­ty.

    First, here’s a look at the pres­sure she’s going to feel from the right to make sure a Ger­man (pre­sum­ably Bun­des­bank chief Jens Wei­d­man) takes over as head of the ECB so he can jack up inter­est rates...ostensibly to help Ger­many savers and retirees despite the fact that this would pos­si­bly tank the euro­zone econ­o­my. So engag­ing in an intra-euro­zone pow­er grab to exe­cute poli­cies that are even more irre­spon­si­ble than before is prob­a­bly going to be on the 2017 agen­da:

    Reuters

    Next ECB pres­i­dent must be Ger­man, Merkel’s Bavar­i­an allies say

    BERLIN | By Car­o­line Cop­ley
    Mon Apr 18, 2016 10:05am EDT

    The next Euro­pean Cen­tral Bank pres­i­dent should come from Ger­many, Ger­man con­ser­v­a­tive politi­cians said on Mon­day, ramp­ing up pres­sure on what they see as too much free-spend­ing by the ECB and not enough rig­or.

    One said the cur­rent pres­i­dent, Ital­ian Mario Draghi, had weak­ened the ECB’s rep­u­ta­tion.

    Such con­ser­v­a­tives have com­plained loud­ly in recent weeks that the ECB’s ultra-low rates are cre­at­ing a “gap­ing hole” in savers’ finances and pen­sion­ers’ retire­ment plans as returns have dropped.

    Ger­many also has a long his­to­ry of pre­fer­ring strict fis­cal and mon­e­tary pol­i­cy.

    Hans-Peter Friedrich, a lead­ing law­mak­er for the Chris­t­ian Social Union (CSU) and for­mer inte­ri­or min­is­ter, told mass-sell­ing dai­ly Bild the pol­i­cy of cur­rent ECB Pres­i­dent Mario Draghi, an Ital­ian, had “lead to a mas­sive loss of cred­i­bil­i­ty.

    “The next ECB chief must be a Ger­man, who feels bound to the Ger­man Bun­des­bank’s tra­di­tion of mon­e­tary sta­bil­i­ty,” Friedrich added.

    Hans-Peter Uhl, the CSU’s spokesman on inte­ri­or affairs, called for a Ger­man finan­cial spe­cial­ist to head the cen­tral bank. Mean­while, Markus Soed­er, finance min­is­ter for the state of Bavaria, told the Bild am Son­ntag paper it was time for a “change of direc­tion” and more Ger­man influ­ence.

    A spokes­woman for the Ger­man Finance Min­istry said the ques­tion of who will suc­ceed Draghi was not rel­e­vant at present since he is not due to step down until Novem­ber 2019.

    Nonethe­less, the fact that some law­mak­ers in Merkel’s coali­tion gov­ern­ment are rais­ing the top­ic now under­scores how fraught rela­tions between the euro zone’s biggest coun­try and Draghi have become.

    Mario Gruppe, an econ­o­mist at Nord LB, described the lat­est com­ments as a new episode in a ser­i­al called “The Ger­mans get annoyed about mon­e­tary pol­i­cy”.

    “It shows that unhap­pi­ness among Ger­man politi­cians about the ECB is increas­ing. And if there are no signs of change, the tone should get even loud­er,” he said.

    How­ev­er, Gruppe does not expect a seri­ous debate about Draghi’s suc­ces­sor for anoth­er two years.

    PRUSSIAN HELMET

    Ear­ly on in his term as pres­i­dent, Draghi was pre­sent­ed with a black-and-gold spiked hel­met dat­ing from 1871 by Bild to sym­bol­ize the news­pa­per’s con­fi­dence that the Ital­ian boss would stick to Pruss­ian-style dis­ci­pline against infla­tion.

    But rela­tions with Europe’s biggest econ­o­my have soured as the cen­tral bank has unleashed round after round of mon­e­tary eas­ing, includ­ing cut­ting its deposit rate into neg­a­tive ter­ri­to­ry and expand­ing asset buys, in an effort to stim­u­late growth and stave off the threat of defla­tion.

    A storm of protest erupt­ed in thrifty Ger­many after Draghi last month described the idea of “heli­copter mon­ey” — send­ing mon­ey direct­ly to cit­i­zens — as a “very inter­est­ing” — if unex­am­ined — con­cept.

    Last week, Finance Min­is­ter Wolf­gang Schaeu­ble said the ECB’s pol­i­cy was caus­ing “extra­or­di­nary prob­lems” for banks and risks under­min­ing sup­port for Euro­pean inte­gra­tion and report­ed­ly blamed its pol­i­cy.

    ...

    “How­ev­er, Gruppe does not expect a seri­ous debate about Draghi’s suc­ces­sor for anoth­er two years.”
    That’s prob­a­bly true. We should­n’t expect a seri­ous debate about Mario Draghi’s suc­ces­sor at the ECB for at least anoth­er two years since his term isn’t up until 2019. But how about an unse­ri­ous high­ly politi­cized debate in the mid­dle of nasty cam­paign sea­son? It’s hard to see why that won’t be a fac­tor. Espe­cial­ly since there’s no rea­son to assume the AfD won’t make sim­i­lar demands for a Ger­man head­ing the ECB.

    So get ready for 2017 to be the year Ger­man politi­cians pledge to ensure the ECB falls into Ger­man hands next. It might not be good pol­i­cy but it’s good pol­i­tics. And it will be espe­cial­ly good pol­i­tics for the Ger­man right-wing if, as SPD leader Sig­mar Gabr­i­al sug­gests below, sav­ing pen­sions and pre­vent­ing elder­ly pover­ty is what they’re going to attack Merkel on from the left:

    Bloomberg

    Merkel Faces First 2017 Elec­tion Gam­bit as Pen­sion Demands Made

    * SPD Chair­man Gabriel calls for halt to dwin­dling pen­sions
    * Par­ty to make pen­sions an elec­tion issue if Merkel oppos­es

    Patrick Don­ahue
    April 12, 2016 — 6:53 AM CDT

    Chan­cel­lor Angela Merkel faced the open­ing gam­bit of the 2017 elec­tion cam­paign as her Social Demo­c­ra­t­ic coali­tion part­ner demand­ed a halt to dwin­dling pen­sions.

    SPD Chair­man Sig­mar Gabriel, Merkel’s vice chan­cel­lor, said his par­ty would seek to halt the decline in aver­age pen­sions as a per­cent­age of work­ing wages at their cur­rent lev­el. Should Merkel’s Chris­t­ian Demo­c­ra­t­ic-led bloc reject that, Gabriel said his par­ty will cam­paign on the issue in next year’s vote, which can be held at the lat­est in Sep­tem­ber.

    “If pen­sion lev­els drop any fur­ther, then old-age pover­ty will become a threat,” Gabriel told the Funke news­pa­per con­sor­tium in a group inter­view pub­lished Tues­day. “If the CDU/CSU aren’t with us, then the SPD will put this to a vote dur­ing the next elec­tion.”

    Merkel, in office for more than a decade, hasn’t announced whether she’ll seek a fourth term. While anx­i­ety over the region’s refugee cri­sis has cost her par­ty sup­port, with CDU loss­es record­ed in three state elec­tions last month, the SPD’s back­ing has dropped to record lows. The SPD slid half a per­cent­age point to 19.5 per­cent in a week­ly Insa poll for Tuesday’s Bild news­pa­per, the first ever read­ing below 20 per­cent. Merkel’s CDU and its CSU Bavar­i­an sis­ter par­ty stood at 31.5 per­cent, also down a half a point.

    As the country’s pop­u­la­tion ages, declin­ing pen­sions have become a source of anx­i­ety among vot­ers. Pen­sions are pro­ject­ed to drop to about 43 per­cent of aver­age wages by 2029 from 46 per­cent in 2020, accord­ing cal­cu­la­tions from Germany’s Labor Min­istry.

    “As the country’s pop­u­la­tion ages, declin­ing pen­sions have become a source of anx­i­ety among vot­ers. Pen­sions are pro­ject­ed to drop to about 43 per­cent of aver­age wages by 2029 from 46 per­cent in 2020, accord­ing cal­cu­la­tions from Germany’s Labor Min­istry.”
    Pro­ject­ed falls in pen­sions should make for quite a polit­i­cal foot­ball. And note that it’s actu­al­ly more omi­nous for mid­dle aged and elder­ly Ger­mans that the above stats might sug­gest because the pen­sions are pro­ject­ed to drop as a per­cent­age of aver­age Ger­man wages and aver­age Ger­man wages have been dec­i­mat­ed for years. And that’s not sim­ply due to the euro­zone cri­sis. Wages have been falling for years because that was the offi­cial plan for Ger­many’s “Agen­da 2010”/Hartz IV nation­al aus­ter­i­ty dri­ve. And don’t for­get the planned pen­sion cuts that were also part of the Agen­da. That should seems like a fac­tor in the pen­sion pains.

    So while there does­n’t appear to be much dis­cus­sion as to whether or not that “Agen­da 2010” reforms start­ed in 2003 are play­ing a role in the ris­ing woes of Ger­man pen­sion­ers, it’s pret­ty much guar­an­teed that Ger­many’s nation­al aus­ter­i­ty pro­gram is actu­al­ly play­ing a role and will con­tin­ue to do so into the future because it would be sil­ly to think oth­er­wise. And that ongo­ing aus­ter­i­ty fall­out is a big rea­son why we should­n’t be sur­prised if sub­stan­dard pen­sions and old-age pover­ty is one of the defin­ing issues for Ger­many pol­i­tics for years to come. Whether or not a cri­tique of Agen­da 2010/Hartz IV itself also becomes a defin­ing issue for Ger­man pol­i­tics remains to be seen, but if you’re look­ing for an issue to debate regard­ing grow­ing pover­ty for elder­ly Ger­mans, the planned nation­al aus­ter­i­ty that cut pen­sions seems like a good place to start:

    Unit­ed Youth Jour­nal­ists

    The Con­tro­ver­sial Lega­cy of Agen­da 2010 – David Zuther, Ger­many

    by Unit­ed Youth Jour­nal­ists
    Sep­tem­ber 23, 2015

    It was August 16 2002, a warm sum­mer day, when Peter Hartz entered the stage in the French Dome of Cen­tral Berlin, where his per­for­mance had been metic­u­lous­ly planned; to say: ” Today is a good day for the unem­ployed in Ger­many”. His enthu­si­asm was shared by many politi­cians and experts at the time. Hartz gave his name to the biggest reforms in the Ger­man labour mar­ket since World War Two. To this day, the ben­e­fits paid to long-time unem­ployed is com­mon­ly known as “Hartz IV”.

    But today, the lega­cy of Peter Hartz and the sweep­ing reforms intro­duced by chan­cel­lor Ger­hard Schröder (Social Demo­c­rat Par­ty SPD) – the “Agen­da 2010 ” – is at the cen­ter of a con­tro­ver­sial debate that con­tin­ues to divide experts, politi­cians and activists. Its sup­port­ers have aggres­sive­ly adver­tised the agen­da as a mod­el for oth­er coun­tries while its crit­ics called the reform a his­tor­i­cal mis­take.

    Peter Hartz, Mes­si­ah of Ger­man busi­ness

    In Sep­tem­ber 2002, after Schröder and his cen­tre-left coali­tion of Social Democ­rats and Greens was re-elect­ed, the Ger­man econ­o­my reached rock bot­tom. The New Econ­o­my bub­ble burst, the unem­ploy­ment rate was 11.3 per­cent and more than 4.7 mil­lion Ger­mans were unem­ployed.

    The gov­ern­ment had to act. In March 2003, Schröder gave a speech to the Ger­man par­lia­ment lay­ing out a path that aban­doned every­thing that social democ­ra­cy had tra­di­tion­al­ly fought for. He declared: ” We will cut state ser­vices and ben­e­fits, sup­port indi­vid­ual respon­si­bil­i­ty and demand more effort from every sin­gle per­son.” Schröder asked Peter Hartz, who was chief human resources offi­cer for the auto­mo­bile com­pa­ny Volk­swa­gen at the time, to design the reforms. Hartz became the reform over­lord, the Mes­si­ah of the Ger­man econ­o­my – or so it was seen by most at the time. The fact that the ben­e­fit paid to long-term unem­ployed is now often called Hartz IV, most like­ly fills him with pride.

    Stig­ma­tis­ing the low­er class

    The Agenda’s core ele­ment is reforms to the Ger­man labour mar­ket. They main­ly con­sist of erod­ing the Ger­man social secu­ri­ty sys­tem, includ­ing dras­tic cuts to ben­e­fits paid to long-term unem­ployed. The idea was clear: if you lose your job, you had bet­ter find a new one fast, or your liv­ing stan­dard will soon slump. Schröder had already set the tone for the debate about unem­ploy­ment in a 2001 speech: “There is no right to be lazy”. The stereo­type of the work­shy, lazy job­less was born. Today, the term “Hartz IV” is wide­ly used to stig­ma­tise the low­er class. Real­i­ty TV shows depict peo­ple on Hartz IV ben­e­fits, eat­ing unhealthy, une­d­u­cat­ed, sit­ting on the couch all day, often scream­ing at their chil­dren, liv­ing in messy homes.

    Hartz IV became a hor­ror to all work­ing-age Ger­mans. It allowed employ­ers to force down wages. Peo­ple look­ing for work now found it almost impos­si­ble to turn down job offers with bad con­di­tions since if they didn’t accept them, they had to face the shame and depri­va­tion that was Hartz IV. As the coali­tion failed to intro­duce a min­i­mum wage (a dis­grace­ful mis­take only cor­rect­ed ten years lat­er), there was no lim­it to employ­ers’ wage-dump­ing.

    The sanc­tion machine

    The Hartz laws also intro­duced a new, con­tro­ver­sial tool for job cen­tres: sanc­tions. From now on, the author­i­ties could cut people’s ben­e­fits as a penal­ty for “offens­es” such as fail­ing to show up at a job inter­view or miss­ing a job­cen­tre appoint­ment. This has a dras­tic impact. The amount of Hartz IV is cal­cu­lat­ed to guar­an­tee a basic sub­sis­tence lev­el. If cuts are made, it effec­tive­ly means that peo­ple are forced to live below sub­sis­tence lev­el by the state. The penal­ties are espe­cial­ly harsh for under-25-year-olds. One missed appoint­ment, and all ben­e­fit pay­ments except hous­ing and health insur­ance are capped. Even those two ser­vices will be frozen in case of a sec­ond offense for three months. In a par­lia­men­tary hear­ing on June 2015, experts warned that tough sanc­tions might lead to the unem­ployed becom­ing home­less and force them to com­mit crimes to make a liv­ing. One mil­lion sanc­tions were hand­ed out by job­cen­tres in 2014 and 20,000 young peo­ple are cur­rent­ly ‘lost’ – out of reach for job­cen­tres. Mean­while, increas­ing­ly many sanc­tions are being with­drawn by courts: in 2014, they ruled that sanc­tions were ille­gal in more than 50,000 cas­es.

    The birth of wage-dump­ing

    Addi­tion­al­ly, Agen­da 2010 includ­ed water­ing down employ­ees’ pro­tec­tion against unfair dis­missal and dereg­u­la­tion of tem­po­rary employ­ment. The explo­sion in the num­ber of peo­ple employed in the low-wage sec­tor or pre­car­i­ous, tem­po­rary jobs in the past decade is there­fore often blamed on the Agen­da reforms. Accord­ing to some sta­tis­tics, the per­cent­age of low-wage work in all jobs went up from 14 to 21.5% in the last few years. Ger­many now has the biggest low-wage indus­try in West­ern Europe. Due to Agen­da 2010, the labour leas­ing indus­try boomed: in-labour leas­ing, pri­vate agen­cies “lend” work­ers to com­pa­nies. The “work­force bro­ker” agency makes huge prof­its, while the com­pa­ny can pay the leased work­ers less than its own employ­ees and there­by reduce its wage bill. The losers in this game are the leased work­ers: accord­ing to one study, 75% of full-time leas­ing work­ers earn a salary below the low-wage thresh­old. Thanks to Agen­da 2010, the num­ber of work­ers in labour leas­ing con­tracts almost tripled between 2003 and 2012.
    The reforms also cre­at­ed a new mass phe­nom­e­non in Ger­many: the work­ing poor. More and more peo­ple work full-time for wages that are still not enough to make a liv­ing. As of now, almost 1.5 mil­lion Ger­mans in work are depen­dent on addi­tion­al ben­e­fits to make ends meet.

    Pen­sions and health­care under attack

    Out­side of the labour mar­ket, Agen­da 2010 includes reduc­tions to pen­sions. The effects of those reg­u­la­tions are not extreme­ly neg­a­tive, giv­en the good eco­nom­ic sit­u­a­tion in Ger­many which has filled retire­ment funds. How­ev­er, labour mar­ket reforms are forc­ing many peo­ple to retire at lat­er times. And in a recent court rul­ing, job­cen­tres were giv­en the right to force long-term unem­ployed peo­ple into ear­ly retire­ment if the author­i­ties con­sid­er them unlike­ly to find work again. This pow­er is prob­lem­at­ic because going into ear­ly retire­ment as a Hartz IV recip­i­ent means auto­mat­i­cal­ly receiv­ing a low­er pen­sion. One char­i­ty esti­mates that until next year, this mech­a­nism will cost 140,000 peo­ple around 10 per­cent of their pen­sion.

    In the health sec­tor, Agen­da 2010 sought to reduce health insur­ance costs by increas­ing individual’s con­tri­bu­tions. Some ser­vices, such as in-vit­ro fer­til­i­sa­tion, were not cov­ered by insur­ance any­more. Addi­tion­al­ly, the prin­ci­ple of shared costs between employ­er and employ­ee was aban­doned for some expen­sive areas. All in all, how­ev­er, the reforms only helped lit­tle in slow­ing down the mas­sive increase in health­care costs.

    A debat­ed suc­cess

    The Agen­da 2010 sup­port­ers faced mas­sive crit­i­cism in the first years of the reforms. Unions crit­i­cised it for alleged­ly dis­man­tling the social safe­ty net and lead­ing to low wages and pover­ty.
    Then came the 2008 finan­cial cri­sis, and the reforms’ sup­port­ers saw an oppor­tu­ni­ty to exon­er­ate ‘their’ Agen­da. It is a fact that the Ger­man econ­o­my per­formed extreme­ly well when the glob­al econ­o­my crashed. The Agen­da cre­ators have argued that Germany’s suc­cess is due to their reforms – which they char­ac­terised as ‘harsh but nec­es­sary’.

    With­out a doubt, there are some suc­cess sto­ries about the Agen­da reforms. In April 2015, the unem­ploy­ment rate in Ger­many was 4.7 per­cent – less than half of what it was in 2002. How­ev­er, one must not only ask ‘ How many peo­ple are employed?’ but also con­sid­er ‘Under what con­di­tions are those peo­ple employed?’. Sad­ly, the answer is that the Agen­da 2010 has led to a sig­nif­i­cant increase in the num­ber of peo­ple in inse­cure, tem­po­rary and low-paid jobs.
    The argu­ment that the reforms helped the econ­o­my get through the cri­sis eas­i­ly is too sim­plis­tic. Germany’s eco­nom­ic suc­cess sto­ry is based on mul­ti­ple, com­plex fac­tors, and not only a set of laws passed in 2003. A 2013 study by the eco­nom­ic think-tank DIW con­clud­ed that the sci­en­tif­ic evi­dence for the Agenda’s effec­tive­ness is ‘incom­plete and incon­sis­tent’.

    Rich coun­try, poor peo­ple

    Despite the Agenda’s pop­u­lar­i­ty and its many promi­nent sup­port­ers, which include for­mer French pres­i­dent Nico­las Sarkozy and the head of the US com­pa­ny Gen­er­al Elec­tric, a crit­i­cal look is worth­while. The reforms’ effects on the econ­o­my may be debat­ed among experts, but the impact on soci­ety is clear: the stereo­types about alleged­ly lazy job­less peo­ple has increased. Hartz IV became a stig­ma, a social shame. Job­less­ness became more embar­rass­ing, with peo­ple on ben­e­fits being forced to con­stant­ly jus­ti­fy why they had trou­ble find­ing work. The reforms have fur­thered class divide in our coun­try. In May, the Organ­i­sa­tion for Eco­nom­ic Coop­er­a­tion and Devel­op­ment (OECD) report­ed that the income gap has widened in Ger­many since the 2000s. Accord­ing to recent data, 2.1 mil­lion Ger­man chil­dren under 15 years of age live below the offi­cial pover­ty line – which is one in five chil­dren. In addi­tion, around 200,000 Ger­man chil­dren live in fam­i­lies that can­not afford appro­pri­ate warm cloth­ing for all fam­i­ly mem­bers.
    Ger­many may be a rich coun­try over­all, but we must not neglect the fact that pover­ty remains a prob­lem.

    ...

    Out­side of the labour mar­ket, Agen­da 2010 includes reduc­tions to pen­sions. The effects of those reg­u­la­tions are not extreme­ly neg­a­tive, giv­en the good eco­nom­ic sit­u­a­tion in Ger­many which has filled retire­ment funds. How­ev­er, labour mar­ket reforms are forc­ing many peo­ple to retire at lat­er times. And in a recent court rul­ing, job­cen­tres were giv­en the right to force long-term unem­ployed peo­ple into ear­ly retire­ment if the author­i­ties con­sid­er them unlike­ly to find work again. This pow­er is prob­lem­at­ic because going into ear­ly retire­ment as a Hartz IV recip­i­ent means auto­mat­i­cal­ly receiv­ing a low­er pen­sion. One char­i­ty esti­mates that until next year, this mech­a­nism will cost 140,000 peo­ple around 10 per­cent of their pen­sion.
    None of that is par­tic­u­lar­ly help­ful for pen­sion­ers, but that’s just part of the dam­age done. It was all the oth­er fac­tors in the arti­cle that have because trans­formed the Ger­many econ­o­my into one of the biggest pools of low-wage temp work­ers in Europe that’s REALLY going to destroy the Ger­man pen­sions. If you’re a Ger­man work­er that’s seen your wages stag­nate for years, that’s not going to help your pen­sion. So not only are pen­sions as a per­cent of wages pro­ject­ed to fall, but they’re falling as a per­cent of cut or stag­nant wages.

    It’s all part of why we should­n’t be sur­prised if attacks on the ECB not only become a polit­i­cal issue when Angela Merkel runs for reelec­tion in 2017, but it’s quite pos­si­bly going to be a polit­i­cal issue basi­cal­ly any time there’s a need for the ECB to cut inter­est rates. Sure, giv­en the alarm­ing trends in Ger­many’s rates of pover­ty and mas­sive wealth inequal­i­ty, it’s only a mat­ter of time before you have a gen­er­a­tion of US-style poor mid­dle-aged and elder­ly Ger­mans who large­ly have to no sav­ings and won’t real­ly care about low cen­tral bank rates. At that point the ECB will prob­a­bly stop feel­ing the heat, at least from the rab­ble. Of course, before the full gut­ting of the Ger­man mid­dle class is com­plete (which could take a few more decades), the ECB will pre­sum­ably just raise rates because that’s what eco­nom­ic con­di­tions mer­it. But ultra-low rates is still pro­ject­ed to last until the end of this decade, which is a lot longer than pissed off Ger­man vot­ers are will­ing to wait. And with Ger­many being an aging soci­ety, the con­cerns of pen­sion­ers are only going to grow in polit­i­cal impor­tance and the politi­cians know this and are no doubt prepar­ing for the era of old-age pover­ty that’s basi­cal­ly guar­an­teed at this point. So, in the mean time, get ready for a lot more ECB bash­ing in Ger­many’s elec­tions. The archi­tects of the Ger­man mir­a­cle need to build a scape­goat.

    Posted by Pterrafractyl | April 19, 2016, 2:45 pm
  18. This def­i­nite­ly sounds like a must-read book. It’s cur­rent­ly only pub­lished in Ger­man so unless you can speak Ger­man it’s a must-read­/­can’t-read book. Either way, here’s a review:

    The Finan­cial Times

    ‘Verteilungskampf’, by Mar­cel Fratzsch­er

    A deli­cious­ly icon­o­clas­tic book that high­lights Germany’s eco­nom­ic under­bel­ly
    Mar­tin Sand­bu

    July 24, 2016

    Review by Mar­tin Sand­bu

    If only we could be more like the Ger­mans. Then we, too, could have a pow­er­house econ­o­my with low unem­ploy­ment, a strong export indus­try and many oth­er good things.

    This is the gist of a wide­spread admi­ra­tion of Europe’s sole super­pow­er. Thus in the euro­zone, the Ger­man lib­er­al­is­ing labour mar­ket reforms of the ear­ly 2000s are often tak­en as the text­book pol­i­cy for those seek­ing pros­per­i­ty in a cur­ren­cy union. Else­where, it is often edu­ca­tion and busi­ness insti­tu­tions — its sys­tem of voca­tion­al train­ing sup­port­ing the Mit­tel­stand of medi­um-sized com­pa­nies that are niche pro­duc­ers of high-qual­i­ty indus­tri­al export goods — that cause admir­ers to swoon.

    Amid such fawn­ing, Mar­cel Fratzsch­er’s book is deli­cious­ly icon­o­clas­tic. The author, who directs the Ger­man Insti­tute for Eco­nom­ic Research (DIW) in Berlin, has form on high­light­ing the country’s eco­nom­ic under­bel­ly, even court­ing con­tro­ver­sy. In an ear­li­er book, he chal­lenged his com­pa­tri­ots’ self-con­grat­u­la­to­ry view of the strength of Germany’s growth and their sense that the euro needs them more than they need the euro.

    In Verteilungskampf: Warum Deutsch­land immer ungle­ich­er wird, Fratzsch­er takes aim at inequal­i­ty. (The title lit­er­al­ly trans­lates as Dis­tri­b­u­tion bat­tle: Why Ger­many is becom­ing ever more unequal; some­thing like The strug­gle for a share would express the mes­sage bet­ter.)

    The book is an acces­si­ble read (if only in Ger­man for now) and gives as good a sum­ma­ry as any of the forces of ris­ing inequal­i­ty that have afflict­ed the rich world in the past few decades: eco­nom­ic and finan­cial glob­al­i­sa­tion; tech­no­log­i­cal change; and — and this is not suf­fi­cient­ly appre­ci­at­ed — active pol­i­cy choic­es. Fratzscher’s gen­er­al dis­cus­sion of the harm exces­sive inequal­i­ty can cause is also good.

    The most instruc­tive and orig­i­nal parts of the book, how­ev­er, are those describ­ing the facts about Ger­man inequal­i­ty and the rea­sons behind it. The specif­i­cal­ly Ger­man ver­sion of the glob­al inequal­i­ty sto­ry may shock Ger­manophile read­ers out­side the coun­try (and no doubt some with­in). Fratzscher’s mes­sage is — by a host of mea­sures, Ger­many is one of the most unequal rich coun­tries in the world.

    The mar­ket incomes of Ger­mans — what they receive before redis­trib­u­tive poli­cies kick in — are as unequal as those of Amer­i­cans. Since aver­age wages have been stag­nant for the past quar­ter-cen­tu­ry, this means the low paid have seen their pre-tax pay fall in real terms.

    Redis­trib­u­tive poli­cies bring post-tax inequal­i­ty to lev­els sim­i­lar to those else­where in con­ti­nen­tal Europe — yet the high degree of tax­es and trans­fers required comes at a cost to Germany’s econ­o­my and polit­i­cal har­mo­ny.

    Wealth is even more unequal than incomes. While the medi­an Ger­man person’s net worth is mod­est by Euro­pean stan­dards, in no oth­er Euro­pean coun­try is wealth so unequal­ly dis­trib­uted — often because of the way fam­i­ly busi­ness­es are priv­i­leged by the tax sys­tem. Wealthy Ger­mans are wealth­i­er (and poor ones poor­er) than their coun­ter­parts in oth­er Euro­pean coun­tries. As cap­i­tal returns are grow­ing faster than wages, unequal wealth exac­er­bates income inequal­i­ty as well.

    High rates of social mobil­i­ty might alle­vi­ate some con­cerns about inequal­i­ty. But here, too, Fratzsch­er expos­es the country’s fail­ings. He argues that the life chances of Ger­mans are over­whelm­ing­ly fixed by the posi­tion or back­ground they are born into. The econ­o­my tends to keep peo­ple stuck in their place in the dis­tri­b­u­tion of income and wealth, and with­in occu­pa­tion­al roles. He blames low mobil­i­ty in part on an ossi­fied pro­fes­sion­al struc­ture in which there has been lit­tle change in tra­di­tion­al “men’s and women’s jobs” in the past 40 years.

    He also finds that Ger­many invests rel­a­tive­ly lit­tle in ear­ly child­hood edu­ca­tion and gen­er­al­ly under­in­vests in human cap­i­tal. The share of work­ers with high­er train­ing than their par­ents, for exam­ple, is among the OECD’s low­est; and Ger­many is one of few coun­tries with a falling share of young men com­plet­ing uni­ver­si­ty-lev­el edu­ca­tion.

    ...

    “The most instruc­tive and orig­i­nal parts of the book, how­ev­er, are those describ­ing the facts about Ger­man inequal­i­ty and the rea­sons behind it. The specif­i­cal­ly Ger­man ver­sion of the glob­al inequal­i­ty sto­ry may shock Ger­manophile read­ers out­side the coun­try (and no doubt some with­in). Fratzscher’s mes­sage is — by a host of mea­sures, Ger­many is one of the most unequal rich coun­tries in the world.

    Yep, by a host of mea­sures, Ger­many is one of the most unequal rich coun­tries in the world. That’s def­i­nite­ly some­thing to keep in mind now that Ger­many is Europe’s mod­el econ­o­my. Espe­cial­ly since the parts of that mod­el econ­o­my that actu­al­ly help alle­vi­ate the grow­ing inequal­i­ty, the redis­tri­b­u­tion­ist poli­cies and wel­fare pro­grams, are under an unre­lent­ing attack via end­less EU-wide aus­ter­i­ty.

    It’s also worth not­ing that when you read:

    ...
    Wealth is even more unequal than incomes. While the medi­an Ger­man person’s net worth is mod­est by Euro­pean stan­dards, in no oth­er Euro­pean coun­try is wealth so unequal­ly dis­trib­uted — often because of the way fam­i­ly busi­ness­es are priv­i­leged by the tax sys­tem. Wealthy Ger­mans are wealth­i­er (and poor ones poor­er) than their coun­ter­parts in oth­er Euro­pean coun­tries. As cap­i­tal returns are grow­ing faster than wages, unequal wealth exac­er­bates income inequal­i­ty as well.
    ...

    it’s a reminder that the down­ward spi­ral of self-rein­forc­ing inequal­i­ty Thomas Piket­ty has been warn­ing the world about applies to Ordolib­er­al economies too.

    Posted by Pterrafractyl | July 31, 2016, 8:47 pm
  19. Here’s a series of arti­cles that high­lights one of the com­pli­ca­tions that could make the UK/EU fight free move­ment of peo­ple in the Brex­it nego­ti­a­tions so messy: First, here’s the lat­est warn­ing from the EU that free move­ments of peo­ples is basi­cal­ly non-nego­tiable if the UK wants to keep its access to the EU mar­ket:

    BBC News

    EU lead­ers ‘not bluff­ing’ over Brex­it terms, warns Mal­ta’s PM

    25 Novem­ber 2016
    From the sec­tion UK Pol­i­tics

    EU lead­ers are not “bluff­ing” when they say the UK will be left with­out access to the sin­gle mar­ket when it leaves the bloc if there is no free move­ment of peo­ple, Mal­ta’s prime min­is­ter says.

    Joseph Mus­cat, whose coun­try assumes the EU’s pres­i­den­cy in Jan­u­ary, told the BBC: “This is real­ly and tru­ly our posi­tion and I don’t see it chang­ing”.

    There­sa May says the UK will begin the legal process to leave the EU by March.

    Mr Mus­cat said talks on the details of a “new rela­tion­ship” could be delayed.

    ‘Best deal for Britain’

    A Down­ing Street spokesman insist­ed nego­ti­a­tions were being approached in the “spir­it of good­will”.

    “This is a nego­ti­a­tion that will take place next year and the gov­ern­ment will set out its nego­ti­at­ing strat­e­gy in the full­ness of time,” he said.

    “The aim of that nego­ti­a­tion is to get the best pos­si­ble deal for Britain, for British com­pa­nies to access and work with and with­in the sin­gle mar­ket and for Euro­pean busi­ness­es to have the same access here.”

    Much polit­i­cal debate has focused on the pos­si­bil­i­ty of a “soft” Brex­it — the UK retain­ing some form of mem­ber­ship of the sin­gle mar­ket in exchange for con­ced­ing some con­trol over immi­gra­tion — and “hard Brex­it” — leav­ing the sin­gle mar­ket but hav­ing fuller con­trol over migra­tion.

    ...

    Asked about a sug­ges­tion from For­eign Sec­re­tary Boris John­son that the UK could in the­o­ry stay in the sin­gle mar­ket and place lim­its on the free­dom of move­ment of EU cit­i­zens, Mr Mus­cat told the BBC: “It’s just not hap­pen­ing”.

    “All of us have been pret­ty clear in our approach that we want a fair deal for the UK but that kind of fair deal can’t trans­late itself into a supe­ri­or deal,” he said.

    “I know that there is absolute­ly no bluff­ing from the Euro­pean side, at least in the coun­cil meet­ings I have attend­ed, say­ing ‘we will start in this posi­tion and then we will soft­en up’.

    “No, this is real­ly and tru­ly our posi­tion.”

    He acknowl­edged the talks could get “com­pli­cat­ed” and amount to a “bit of a Catch 22 — it won’t be a sit­u­a­tion when one side gains and the oth­er side los­es.

    “We are all going to lose some­thing but there will not be a sit­u­a­tion when the UK has a bet­ter deal than it has today.”

    ...

    Mr Mus­cat’s com­ments come days after the UK’s Brex­it Sec­re­tary David Davis described his meet­ing with the Euro­pean Par­lia­men­t’s chief nego­tia­tor Guy Ver­hof­s­tadt as a “good start”.

    Mr Davis said their pre-nego­ti­a­tions dis­cus­sion had been able to cov­er struc­tures and how both sides pro­pose to approach the Brex­it talks, adding a deal was pos­si­ble that was in the inter­ests of the EU and the UK.

    The UK gov­ern­ment has said it does not want to reveal its nego­ti­at­ing hand on Brex­it before the talks take place.

    “Asked about a sug­ges­tion from For­eign Sec­re­tary Boris John­son that the UK could in the­o­ry stay in the sin­gle mar­ket and place lim­its on the free­dom of move­ment of EU cit­i­zens, Mr Mus­cat told the BBC: “It’s just not hap­pen­ing”.”

    Those were some strong words from the guy who is going to assume the EU’s pres­i­den­cy in Jan­u­ary. And based on those strong words it would appear that there’s no way the UK can stay in the sin­gle mar­ket with­out con­ced­ing on the EU’s free move­ment of peo­ple poli­cies, which is a bit of a stick­ing point since get­ting rid of that pol­i­cy was one of the dri­ving fac­tors behind the whole Brex­it cam­paign.

    But those aren’t the only EU words on the mat­ter. The EU’s chief Brex­it nego­tia­tor also had a mes­sage for the UK on this mat­ter: the EU is con­sid­er­ing allow­ing Brits to keep their cur­rent EU rights, includ­ing the free move­ment of peo­ple, but only for an annu­al fee that indi­vid­u­als will have to pay:

    Press Asso­ci­a­tion

    Britons could pay for EU cit­i­zen­ship after Brex­it, says top nego­tia­tor

    Brex­it nego­tia­tor said he ‘sup­port­ed the prin­ci­ple’ behind UK cit­i­zens keep­ing their EU rights by pay­ing an annu­al fee

    Fri­day 25 Novem­ber 2016 17.54 EST

    Britons could pay to retain the ben­e­fits of Euro­pean Union cit­i­zen­ship after Brex­it under plans being con­sid­ered by MEPs.

    The Euro­pean parliament’s lead Brex­it nego­tia­tor Guy Ver­hof­s­tadt said he sup­port­ed the prin­ci­ple of the idea, which would see UK cit­i­zens send­ing an annu­al fee to Brus­sels..

    The for­mer Bel­gian prime min­is­ter said Britons who vot­ed remain did not want to sev­er their links to the EU.

    “Many say ‘we don’t want to cut our links’,” he told the Times. “I like the idea that peo­ple who are Euro­pean cit­i­zens and say­ing they want to keep it have the pos­si­bil­i­ty of doing so. As a prin­ci­ple I like it.”

    The pro­pos­als were tabled by a lib­er­al MEP from Lux­em­bourg and MEPs will vote on the pro­pos­als by the end of the year, but any Brex­it deal with the UK would have to have the agree­ment of the lead­ers of the oth­er 27 EU nations as well as the par­lia­ment.

    Brex­it-back­ing Tory MP Andrew Brid­gen claimed that these plans were just the EU attempt­ing to under­mine the ref­er­en­dum result.

    He told the news­pa­per: “It’s an attempt to cre­ate two class­es of UK cit­i­zen and to sub­vert the ref­er­en­dum vote. The truth is that Brus­sels will try every trick in the book to stop us leav­ing.”

    “It’s an attempt to cre­ate two class­es of UK cit­i­zen and to sub­vert the ref­er­en­dum vote. The truth is that Brus­sels will try every trick in the book to stop us leav­ing.”

    Is this just a trick? Or is the EU seri­ous­ly con­sid­er­ing a fee-for-rights ser­vice? If so, it would be real­ly inter­est­ing to learn more about what exact­ly this annu­al fee is going to cost. Because if it’s too expen­sive for poor Brits who might desire to go work in the EU, that would indeed cre­ate a kind of two-tier UK class-sys­tem: those who can afford EU rights and myr­i­ad of ben­e­fits that come with that includ­ing all the eco­nom­ic oppor­tu­ni­ties that come with eas­i­ly being able to trav­el and work on the Euro­pean con­ti­nent. And those who can’t and are stuck on the UK. If the annu­al fee is like one pound, on the oth­er hand, it would be a very dif­fer­ent sce­nario.

    So it will be inter­est­ing to learn more about what those annu­als fees are expect­ed to be if that’s a real pro­pos­al and there real­ly is going to be an option for Brits to up and move to the EU with rel­a­tive ease. Espe­cial­ly since Europe’s largest debt col­lec­tor, Intrum Justi­tia AB, recent­ly con­duct­ed a sur­vey on Euro­pean sav­ing habits. Not sur­pris­ing­ly giv­en the aus­ter­i­ty-induced eco­nom­ic dev­as­ta­tion, over two thirds of Euro­peans put their sav­ings in the bank despite the ultra-low inter­est rate envi­ron­ment. And also not sur­pris­ing­ly, almost a quar­ter of EU cit­i­zens expressed an inter­est in relo­cat­ing to a dif­fer­ent coun­try to escape their nation’s eco­nom­ic sit­u­a­tion,includ­ing almost a third of young Britons:

    Bloomberg

    Neg­a­tive Rates Are Fail­ing to Halt Sav­ings Obses­sion in Europe

    Novem­ber 20, 2016 — 1:00 PM CST

    * Sur­vey shows 69% of Euro­peans put sav­ings into bank accounts
    * Intrum Justi­tia sur­vey also shows 29% want­i­ng to move abroad

    After years of tur­bo-dri­ven cen­tral bank stim­u­lus, most Euro­peans still want to leave their spare cash in sav­ings accounts, even if those accounts pay zero inter­est.

    That’s the find­ing of a sur­vey by Europe’s biggest debt col­lec­tor, Stock­holm-based Intrum Justi­tia AB.

    “After the finan­cial cri­sis, peo­ple have felt a need — even if they have small means — to cre­ate some kind of secu­ri­ty,” Chief Exec­u­tive Offi­cer Mikael Eric­son said in an inter­view in Stock­holm on Nov. 16. “It can’t be that peo­ple save in a bank account because of the fan­tas­tic returns, so it must be about a sense of secu­ri­ty, hav­ing mon­ey in the bank.”

    Some 69 per­cent of Euro­peans put their sav­ings into bank accounts, accord­ing to Intrum Justitia’s Euro­pean Con­sumer Pay­ment Report. The sur­vey is based on feed­back gath­ered in Sep­tem­ber and cov­ers about 21,000 peo­ple in 21 coun­tries.

    The sur­vey also shows that 26 per­cent of Euro­peans pre­fer keep­ing their sur­plus funds in cash, while 16 per­cent hold stocks. Only 14 per­cent turn to invest­ment funds, 8 per­cent invest in real estate and 8 per­cent in bonds. In Den­mark and Swe­den, where cen­tral bank bench­mark rates are neg­a­tive, almost 80 per­cent of peo­ple put their sur­plus cash in bank accounts. In France, the U.K. and the Nether­lands, the fig­ure is above 80 per­cent.

    But wor­ry­ing­ly, Intrum Justitia’s sur­vey shows that even after years of extreme mon­e­tary sup­port, many Euro­peans are won­der­ing whether they’d be bet­ter off if they lived some­where else.

    Look­ing for Escape

    Across Europe, 24 per­cent of peo­ple said they want to move to escape their country’s finan­cial plight. About 27 per­cent of respon­dents said they some­times can’t pay their debts. Of those, 58 per­cent feel they don’t have enough mon­ey “for a dig­ni­fied exis­tence.”

    In Britain, 29 per­cent of peo­ple aged 18 to 24 said they’d con­sid­er leav­ing the coun­try, pos­si­bly in response to the U.K.’s deci­sion to quit the Euro­pean Union, Intrum Justi­tia said. A year ear­li­er, only 13 per­cent of young Britons said they want­ed to leave.

    The sur­vey also revealed how finan­cial­ly frag­ile many Euro­peans con­tin­ue to be almost half a decade after the region’s debt cri­sis. About 44 per­cent of all Euro­peans were unable to pay at least one bill on time dur­ing the last 12 months, main­ly because of a lack of mon­ey, the sur­vey found. Greece was worst, with 76 per­cent of house­holds fail­ing to pay on time.

    The report comes as cen­tral banks run out of tools to pro­vide fur­ther stim­u­lus and after years of aus­ter­i­ty poli­cies in Europe pro­duced ques­tion­able results. Now, with U.S. Pres­i­dent-elect Don­ald Trump promis­ing an invest­ment boom dri­ven by fis­cal stim­u­lus, the out­look for inter­est rates is unclear. An infla­tion­ary spend­ing cycle would dri­ve rates high­er, but an eco­nom­ic down­turn trig­gered by an inter­na­tion­al trade war might have the oppo­site effect.

    ...

    Across Europe, 24 per­cent of peo­ple said they want to move to escape their country’s finan­cial plight. About 27 per­cent of respon­dents said they some­times can’t pay their debts. Of those, 58 per­cent feel they don’t have enough mon­ey “for a dig­ni­fied exis­tence.””

    One in four Euro­peans want to move to escape their eco­nom­ic plight. When you look at num­bers like that you can see one of the rea­sons why the Brex­it was tempt­ing. And yet a third of Brits age 18 to 24 want to move too, in part in response to the Brex­it:

    ...
    In Britain, 29 per­cent of peo­ple aged 18 to 24 said they’d con­sid­er leav­ing the coun­try, pos­si­bly in response to the U.K.’s deci­sion to quit the Euro­pean Union, Intrum Justi­tia said. A year ear­li­er, only 13 per­cent of young Britons said they want­ed to leave.
    ...

    Yes, we have a sit­u­a­tion where the UK vot­ed to leave the EU, in part out of anx­i­eties over immi­gra­tion enabled by the EU’s right to free­dom of move­ment, and the EU is now demand­ing the UK allow that free­dom of move­ment if it’s going to keep free trade with the EU. And now the EU is float­ing the idea that may Brits will be able to keep their EU rights to free move­ment, along with all their oth­er EU rights, but only for a fee. And we don’t know yet what that fee might be and whether or not it will cre­ate two-tier sys­tem for UK cit­i­zens. But we do know that a large num­ber of EU’s economies are so messed up that a quar­ter of Euro­peans would like to move, pos­si­bly to the UK, along with a large per­cent­age of young Britons, many of whom are going to want to move back to the EU.

    So if the EU does pass the fee-for-EU-rights law and the UK does imple­ment a Brex­it with­out the EU’s free­dom of move­ment demands, the UK could end up not only block­ing immi­gra­tion fur­ther EU but actu­al­ly end up see­ing a net migra­tion of young peo­ple. Or peo­ple in gen­er­al across the age spec­trum. Because we’ll a sit­u­a­tion where it’s very easy for peo­ple to leave the UK, but not enter. And the harsh­er the eco­nom­ic fall­out from a Brex­it ends up being, poten­tial­ly due in part to the loss of sin­gle mar­ket access if that’s what hap­pens, the greater the eco­nom­ic incen­tive for peo­ple to leave.

    It’s all a reminder that the UK isn’t just nego­ti­at­ing a sig­nif­i­cant amount of its eco­nom­ic future right now in these Brex­it nego­ti­a­tions, it’s poten­tial­ly nego­ti­at­ing whether or not there’s going to be a youth exo­dus. Although since the EU’s eco­nom­ic set up is so dys­func­tion­al that youth unem­ploy­ment it still around 20 per­cent, there’s going to be a lim­it to the num­ber of pos­si­ble job open­ings for Britain’s youth to flee to so even if we see this asym­met­ric UK migra­tion sit­u­a­tion mate­ri­al­ize who knows what the impact will actu­al­ly be. Still, if that migra­tion asym­me­try ends up being a per­ma­nent fea­ture between EU and UK rela­tions, and if the euro­zone holds togeth­er and the British pounds falls in val­ue sig­nif­i­cant­ly rel­a­tive to the euro — which is very pos­si­ble in the long run giv­en the dom­i­na­tion of pro-defla­tion Ordolib­er­al thought in the euro­zone — it’s going to be inter­est­ing to see how long it takes before we see anoth­er EU “-exit” event trig­gered, in part, by ‘all these Brits com­ing in and tak­ing every­one’s jobs’. Would­n’t that be some­thing.

    Posted by Pterrafractyl | November 25, 2016, 11:56 pm
  20. Here’s a pair of arti­cles that serve as a reminder that the mys­tery of near com­plete absence of wage growth in Europe in recent years, even in economies like Ger­many that are run­ning at near full capac­i­ty, prob­a­bly isn’t going to be helped by the EU’s sys­tem­at­ic attack on labor unions and fix­a­tion on aus­ter­i­ty or the last decade or so.

    First, here’s a quick look at the wages in Ger­many dur­ing a peri­od of record low unem­ploy­ment, mas­sive trade sur­plus­es, bud­get sur­plus­es, and the strongest econ­o­my the coun­try has seen since reuni­fi­ca­tion. So how are Ger­man wages doing? Sur­prise! They’re per­sis­tent­ly stag­nant. But there is one source of hope for high­er wages: union nego­ti­a­tions:

    Bloomberg Mar­kets

    Ger­many Asks If Its Eco­nom­ic Boom Needs a Pol­i­cy Rethink

    By Car­olynn Look
    Jan­u­ary 17, 2018, 7:05 AM CST Updat­ed on Jan­u­ary 17, 2018, 11:15 AM CST

    * Bundesbank/IMF con­fer­ence to dis­cuss Ger­man sur­plus­es, wages
    * Chris­tine Lagarde and ECB’s Benoit Coeure are among speak­ers

    Ger­many is about to throw its eco­nom­ic boom open to debate.

    Acknowl­edg­ing a “par­tic­u­lar­ly intense” dis­cus­sion in recent years on mat­ters such as the country’s twin sur­plus­es, the Bun­des­bank will host a clutch of pol­i­cy mak­ers and econ­o­mists in Frank­furt on Thurs­day, includ­ing Inter­na­tion­al Mon­e­tary Fund Man­ag­ing Direc­tor Chris­tine Lagarde.

    While robust growth and record-low unem­ploy­ment have been a boon for Europe’s largest econ­o­my and the region, it has also drawn per­sis­tent crit­i­cism for being ret­i­cent to spend. A focus now is whether that’ll change as tight labor mar­kets push up wages and com­pa­nies invest, and whether the gov­ern­ment will make the reforms need­ed to boost pro­duc­tiv­i­ty.

    “The trou­ble in Ger­many is there’s a lot of com­pla­cen­cy,” Ifo Insti­tute Pres­i­dent Clemens Fuest, who will speak at the event, said in a Bloomberg TV inter­view. “The gov­ern­ment thinks it needs to do noth­ing because the econ­o­my is going alright. But that’s wrong — the next cri­sis will come.”

    ...

    Cur­rent Account

    One of the conference’s more con­tro­ver­sial top­ics might be Germany’s cur­rent-account sur­plus, a light­ning rod for crit­i­cism — includ­ing from U.S. Pres­i­dent Don­ald Trump’s admin­is­tra­tion — that it’s a sign of trade dis­tor­tion. Lagarde’s IMF has urged the nation to reduce its exter­nal imbal­ances.

    Ger­man politi­cians have balked at the sug­ges­tion that maybe the coun­try should export less or import more. Chan­cel­lor Angela Merkel has not­ed the crit­i­cism, with­out accept­ing it, and said last year that her government’s plans to invest more in infra­struc­ture might help.

    Fis­cal Pol­i­cy

    The issue of what to do with the cash has been hot­ly con­test­ed. The gov­ern­ment wants to reduce its debt bur­den. At more than 60 per­cent of GDP, that’s above the max­i­mum set by Euro­pean Union rules, though Ger­many is hard­ly alone. The country’s top eco­nom­ic insti­tutes weighed in with their bian­nu­al assess­ment last fall, argu­ing for low­er income tax and social-secu­ri­ty con­tri­bu­tions. Some econ­o­mists want greater invest­ment in edu­ca­tion.

    Wage Growth

    If Ger­mans are to spend more, they prob­a­bly need to be paid more. Yet despite the low­est unem­ploy­ment since reuni­fi­ca­tion, and in com­mon with devel­oped nations else­where, wage growth has been slow to pick up.

    That may be on the cusp of chang­ing. Germany’s largest union IG Met­all is in talks on behalf of 3.9 mil­lion met­al­work­ers and engi­neers for 6 per­cent more pay, plus an option to receive sub­si­dies for reduced work­ing hours to take care of fam­i­ly mem­bers.

    Bol­ster­ing its argu­ment is the increas­ing­ly scarce sup­ply of labor. The Bun­des­bank pre­dicts that an aging pop­u­la­tion and slow­er migra­tion will lead to a sig­nif­i­cant decline in employ­ment growth in the next few years. That holds ram­i­fi­ca­tions for out­put if com­pa­nies don’t find a way to boost pro­duc­tiv­i­ty.

    “We’ve not seen this kind of eco­nom­ic data from Ger­many since the reuni­fi­ca­tion — it’s unprece­dent­ed,” said Claus Vis­te­sen, an econ­o­mist at Pan­theon Macro­eco­nom­ics. “Whether growth can be sus­tained is anoth­er ques­tion, espe­cial­ly if you look at where the labor mar­ket is, but that doesn’t nec­es­sar­i­ly mean it’s going to hit a brick wall.”

    ———-

    “Ger­many Asks If Its Eco­nom­ic Boom Needs a Pol­i­cy Rethink” by Car­olynn Look; Bloomberg Mar­kets; 01/17/2018

    “While robust growth and record-low unem­ploy­ment have been a boon for Europe’s largest econ­o­my and the region, it has also drawn per­sis­tent crit­i­cism for being ret­i­cent to spend. A focus now is whether that’ll change as tight labor mar­kets push up wages and com­pa­nies invest, and whether the gov­ern­ment will make the reforms need­ed to boost pro­duc­tiv­i­ty.”

    Yep, with robust growth and record-low unem­ploy­ment, the ques­tion of why wages aren’t grow­ing is com­ing into focus. Although note the oth­er thing that is for­ev­er in focus for Ger­many pol­i­cy-mak­ers: “whether the gov­ern­ment will make the reforms need­ed to boost pro­duc­tiv­i­ty.” Keep in mind that “the reforms need­ed to boost pro­duc­tiv­i­ty,” typ­i­cal­ly trans­late into “low­er­ing costs of work­ers”. The “Agen­da 2010” reforms the Ger­man gov­ern­ment put in place in 2005 were basi­cal­ly all about low­er­ing labor costs. So the above state­ment could be rea­son­ably trans­lat­ed as, “a focus now is whether that’ll change as tight labor mar­kets push up wages and com­pa­nies invest, and whether the gov­ern­ment will make the reforms need­ed to [keep employ­ee costs low].”

    And note now, in the con­text of this dis­cus­sion of stag­nant wages, Clemens Fuest, the Pres­i­dent of the Ifo Insti­tute — an influ­en­tial Ger­man eco­nom­ic think-tankand a fan of the kinds of aus­ter­i­ty poli­cies inflict­ed upon Greece, is com­plain­ing about how, “The trou­ble in Ger­many is there’s a lot of com­pla­cen­cy,” which is anoth­er way of say­ing ‘the cur­rent eco­nom­ic boom is no excuse for not doing more aus­ter­i­ty’:

    ...
    “The trou­ble in Ger­many is there’s a lot of com­pla­cen­cy,” Ifo Insti­tute Pres­i­dent Clemens Fuest, who will speak at the event, said in a Bloomberg TV inter­view. “The gov­ern­ment thinks it needs to do noth­ing because the econ­o­my is going alright. But that’s wrong — the next cri­sis will come.”
    ...

    So, on one lev­el, it’s pret­ty clear why Ger­many wages remain stag­nant: the gov­ern­ment has long view stag­nant wages as cen­tral to Ger­many’s eco­nom­ic suc­cess, even if that isn’t ful­ly admit­ted in pub­lic.

    But note the one fac­tor that might lead to at least some increase in Ger­many wages: Germany’s largest union, IG Met­all, is in talks on behalf of 3.9 mil­lion met­al­work­ers and engi­neers:

    ...

    Wage Growth

    If Ger­mans are to spend more, they prob­a­bly need to be paid more. Yet despite the low­est unem­ploy­ment since reuni­fi­ca­tion, and in com­mon with devel­oped nations else­where, wage growth has been slow to pick up.

    That may be on the cusp of chang­ing. Germany’s largest union IG Met­all is in talks on behalf of 3.9 mil­lion met­al­work­ers and engi­neers for 6 per­cent more pay, plus an option to receive sub­si­dies for reduced work­ing hours to take care of fam­i­ly mem­bers.
    ...

    So pret­ty much the only thing that might trig­ger a rise in Ger­many’s over­all wages is a pow­er­ful union. And sure, maybe, at some point in the future, the aging pop­u­la­tion and slow­er migra­tion will lead to such a mas­sive short­age of work­ers that wages start creep­ing up in response. But con­sid­er­ing that unem­ploy­ment is already at a record low and wages remain stag­nant, it’s unclear how much wage growth we should expect from future labor short­ages. Plus, giv­en the nature of the EU, with free move­ment of labor, it’s unclear when this hypo­thet­i­cal future labor short­age is even going to take place. And when when keep­ing wages low is seen as crit­i­cal to Ger­many’s eco­nom­ic suc­cess by the coun­try’s key pol­i­cy-mak­ers, it’s also unclear that we should­n’t assume the gov­ern­ment will take steps to ensure a labor short­age does­n’t result in high­er wages.

    At this point, a pow­er­ful union looks like the only real­is­tic path to high­er wages in Ger­many. In the midst of an eco­nom­ic boom. So with that in mind, here’s a reminder that the destruc­tion of the col­lec­tive bar­gain­ing sys­tem across Europe has been one of the key out­comes of the Great Reces­sion and it was an inten­tion­al out­come:

    Social Europe

    Why Won’t Wages In Europe Rise As They Should?

    by Thorsten Schul­ten and Malte Lue­bker on 9 August 2017

    The eco­nom­ic main­stream is per­plexed: growth is final­ly tak­ing hold across Europe, eco­nom­ic fore­casts have been revised upwards, and employ­ment is expand­ing. The only indi­ca­tor that stub­born­ly refus­es to fol­low suit is wage growth, defy­ing text­books and eco­nom­ic ortho­doxy alike. Bloomberg has called it the “mys­tery of miss­ing wage growth,” the Finan­cial Times writes about the “Eurozone’s strange low-wage employ­ment boom,” and the Euro­pean Com­mis­sion has put for­ward the diag­no­sis of a “wage-poor recov­ery”. More­over, there is a grow­ing con­sen­sus among eco­nom­ic pol­i­cy-mak­ers that wages should indeed grow much faster that they do.

    An unlike­ly cheer­leader for high­er wages is the Euro­pean Cen­tral Bank (ECB), whose fail­ure to nudge infla­tion upwards has led it to look for out­side help. “The case for high­er wages is unques­tion­able,” Mario Draghi has neat­ly put it. Like­wise, the Com­mis­sion argues that “the out­look for wages has now moved cen­tre-stage for the sus­tain­abil­i­ty of the recov­ery,” and even the IMF – point­ing fin­gers at Ger­many – has dis­cov­ered the virtues of wage growth. It looks as if the Euro­pean trade union move­ment has found some improb­a­ble allies in its cam­paign, “Europe needs a pay rise”.

    ...

    This is bad news for pri­vate con­sump­tion, cur­rent­ly the main engine behind Euro­pean growth. For some years, low infla­tion had at least ensured mod­est real wage gains despite low pay set­tle­ments. Across the Euro area, these have remained far below of what they used to be pri­or to the cri­sis of 2008/09 (see Chart 1).

    So, what is hold­ing wages back? Ask any econ­o­mist with a neo-clas­si­cal out­look, and she – or, more like­ly, he – will tell you that wages fol­low prices and pro­duc­tiv­i­ty. Both have, of course, grown at an anaemic pace of late. But are low infla­tion and the lack­lus­tre pro­duc­tiv­i­ty per­for­mance the cause of sub­dued wage growth, or mere­ly a symp­tom? Start with infla­tion. Tra­di­tion­al­ly, cen­tral bankers have been obsessed about wage-price spi­rals and called for wage mod­er­a­tion to rein in infla­tion. Now, they are dis­cov­er­ing to their detri­ment that wage-price spi­rals work in reverse, too. The poor per­for­mance of wages is, in fact, seen as one of the key rea­sons why domes­tic price pres­sures have been sub­dued and core infla­tion has dis­ap­point­ed con­sis­tent­ly over the past few years.

    The case of pro­duc­tiv­i­ty is more com­plex. Econ­o­mists like to treat pro­duc­tiv­i­ty growth as exoge­nous, deter­mined by hard-to-quan­ti­fy fac­tors such as tech­ni­cal change. For all the buzz about the dig­i­tal rev­o­lu­tion, by this account the 1960s and 1970s were the hey­days of ram­pant inno­va­tion, pro­duc­ing pro­duc­tiv­i­ty growth at up to ten times the cur­rent pace. Strange, also, that pro­duc­tiv­i­ty growth went into a sud­den reverse in 2008/09, just as the finan­cial cri­sis hit, and has been stuck in low gear ever since. Did tech­ni­cal change come to an abrupt halt, by sheer chance at about the same time Europe faced the biggest demand drop in a gen­er­a­tion?

    Some find this sto­ry hard to swal­low. Sure­ly, if wages were to rise, entre­pre­neurs would buy new machin­ery and find ways to make more effi­cient use of scarce work­ers? In the eco­nom­ic jar­gon, this is called capital–labour sub­sti­tu­tion and is gen­er­al­ly rec­og­nized as a dri­ving force behind long-run pro­duc­tiv­i­ty growth. But it is no longer hap­pen­ing. Accord­ing to the ECB, cap­i­tal deep­en­ing has been vir­tu­al­ly absent since 2013. But then, why should firms invest in labour-sav­ing tech­nolo­gies when there is no cost pres­sure from the wage front and aggre­gate demand remains fee­ble? Accept this log­ic, and pro­duc­tiv­i­ty growth becomes endoge­nous – some­thing that is itself dri­ven by macro­eco­nom­ic fac­tors, with wages play­ing a promi­nent role.

    But maybe we are about to wit­ness a return to robust wage growth? All the signs seem to point that way. “As eco­nom­ic activ­i­ty gains momen­tum and the labour mar­ket tight­ens, upward pres­sures on wages are expect­ed to inten­si­fy,” was the ECB’s assess­ment just over a year ago. Now, the ver­dict is that “Euro area wage growth remains low”. In fact, the ECB has a long his­to­ry of pre­dict­ing that wage growth is just around the cor­ner, only to revise fore­casts down­wards again and again. For Europe’s work­ers, it’s a case of always jam tomor­row, nev­er jam today.

    So why do stan­dard eco­nom­ic mod­els keep on pre­dict­ing wage growth that then fails to mate­ri­al­ize? One pos­si­bil­i­ty is that they are fed with wrong or mis­lead­ing labour mar­ket data. There are indeed good rea­sons to believe that head­line unem­ploy­ment rates under­es­ti­mate slack in the labour mar­ket, giv­en that every­one who works for at least an hour per week counts among the employed. With the spread of pre­car­i­ous con­tracts and often invol­un­tary part-time employ­ment, there now are mil­lions of work­ers in Europe who would hap­pi­ly move to a reg­u­lar job.

    The more wor­ry­ing pos­si­bil­i­ty is that the mod­els were trained to pre­dict the behav­iour of wages in a world that no longer exists. In the name of flex­i­bil­i­ty and com­pet­i­tive­ness – and often at the behest of the Com­mis­sion, the ECB and the IMF – post-cri­sis labour mar­ket reforms have put the axe to cen­tral­ized col­lec­tive bar­gain­ing and a myr­i­ad of oth­er pro­tec­tions. Tak­ing into account that wage-set­ting insti­tu­tions have been severe­ly weak­ened, the fail­ure of wages to grow looks much less sur­pris­ing.

    Almost every­one now seems to agree that wages have to grow if Europe wants to escape the cycle of weak demand, low infla­tion, stag­nant cap­i­tal deep­en­ing and low pro­duc­tiv­i­ty growth for good. But wage growth will not pick up in response to a mag­ic wand held by cen­tral bankers. Instead, Europe needs to re-build wage-set­ting insti­tu­tions – chiefly by active­ly sup­port­ing col­lec­tive bar­gain­ing, by pro­vid­ing for exten­sion mech­a­nisms that increase cov­er­age of col­lec­tive agree­ments, and by devel­op­ing a Euro­pean min­i­mum wage pol­i­cy that guar­an­tees a decent liv­ing wage to all.

    ———-

    “Why Won’t Wages In Europe Rise As They Should?” by Thorsten Schul­ten and Malte Lue­bker; Social Europe; 08/09/2017

    “An unlike­ly cheer­leader for high­er wages is the Euro­pean Cen­tral Bank (ECB), whose fail­ure to nudge infla­tion upwards has led it to look for out­side help. “The case for high­er wages is unques­tion­able,” Mario Draghi has neat­ly put it. Like­wise, the Com­mis­sion argues that “the out­look for wages has now moved cen­tre-stage for the sus­tain­abil­i­ty of the recov­ery,” and even the IMF – point­ing fin­gers at Ger­many – has dis­cov­ered the virtues of wage growth. It looks as if the Euro­pean trade union move­ment has found some improb­a­ble allies in its cam­paign, “Europe needs a pay rise”.”

    It looks as if the Euro­pean trade union move­ment has found some improb­a­ble allies. And in the case of the IMF it’s an exceed­ing­ly improb­a­ble ally con­sid­er­ing the role the IMF played in the Troi­ka demand­ing aus­ter­i­ty and ‘struc­tur­al reforms’ designed to weak­en unions in one coun­try after anoth­er. But bet­ter late than nev­er when it comes to things like rec­og­niz­ing that wage-price spi­rals can work in reverse:

    ...
    So, what is hold­ing wages back? Ask any econ­o­mist with a neo-clas­si­cal out­look, and she – or, more like­ly, he – will tell you that wages fol­low prices and pro­duc­tiv­i­ty. Both have, of course, grown at an anaemic pace of late. But are low infla­tion and the lack­lus­tre pro­duc­tiv­i­ty per­for­mance the cause of sub­dued wage growth, or mere­ly a symp­tom? Start with infla­tion. Tra­di­tion­al­ly, cen­tral bankers have been obsessed about wage-price spi­rals and called for wage mod­er­a­tion to rein in infla­tion. Now, they are dis­cov­er­ing to their detri­ment that wage-price spi­rals work in reverse, too. The poor per­for­mance of wages is, in fact, seen as one of the key rea­sons why domes­tic price pres­sures have been sub­dued and core infla­tion has dis­ap­point­ed con­sis­tent­ly over the past few years
    ...

    But even if insti­tu­tions like the IMF have sud­den­ly rec­og­nized that stag­nant (or falling) wages don’t come with some sort of mag­i­cal self-cor­rect­ing mech­a­nism and can actu­al­ly become a self-rein­forc­ing prophe­cy, it’s still not at all clear what’s going to lead to high­er wages across Europe thanks, in part, to the mas­sive attack on col­lec­tive bar­gain­ing the IMF and Euro­pean insti­tu­tions demand­ed in recent years as part of the aus­ter­i­ty poli­cies

    ...
    So why do stan­dard eco­nom­ic mod­els keep on pre­dict­ing wage growth that then fails to mate­ri­al­ize? One pos­si­bil­i­ty is that they are fed with wrong or mis­lead­ing labour mar­ket data. There are indeed good rea­sons to believe that head­line unem­ploy­ment rates under­es­ti­mate slack in the labour mar­ket, giv­en that every­one who works for at least an hour per week counts among the employed. With the spread of pre­car­i­ous con­tracts and often invol­un­tary part-time employ­ment, there now are mil­lions of work­ers in Europe who would hap­pi­ly move to a reg­u­lar job.

    The more wor­ry­ing pos­si­bil­i­ty is that the mod­els were trained to pre­dict the behav­iour of wages in a world that no longer exists. In the name of flex­i­bil­i­ty and com­pet­i­tive­ness – and often at the behest of the Com­mis­sion, the ECB and the IMF – post-cri­sis labour mar­ket reforms have put the axe to cen­tral­ized col­lec­tive bar­gain­ing and a myr­i­ad of oth­er pro­tec­tions. Tak­ing into account that wage-set­ting insti­tu­tions have been severe­ly weak­ened, the fail­ure of wages to grow looks much less sur­pris­ing.
    ...

    “In the name of flex­i­bil­i­ty and com­pet­i­tive­ness – and often at the behest of the Com­mis­sion, the ECB and the IMF – post-cri­sis labour mar­ket reforms have put the axe to cen­tral­ized col­lec­tive bar­gain­ing and a myr­i­ad of oth­er pro­tec­tions. Tak­ing into account that wage-set­ting insti­tu­tions have been severe­ly weak­ened, the fail­ure of wages to grow looks much less sur­pris­ing.”

    Col­lec­tive bar­gain­ing, the only clear dri­ver for high­er wages in Ger­many dur­ing a record boom econ­o­my, was axed across Europe. Often at the behest of the Com­mis­sion, the ECB and the IMF (the Troi­ka) in the name of “struc­tur­al reform”.

    So that’s all some­thing to keep in mind should Europe’s eco­nom­ic recov­ery con­tin­ues with­out the kind of mean­ing­ful wage growth econ­o­mists expect: it turns out one of the key struc­tur­al reforms demand­ed by the Troi­ka might induce self-rein­forc­ing wage-price defla­tion­ary death spi­rals. It’s an out­come so awful for near­ly every­one you almost have to won­der why they demand­ed it in the first place. Almost.

    Posted by Pterrafractyl | January 25, 2018, 10:50 pm

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