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.
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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.
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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 DebateWill a minimum wage destroy German jobs?
By Peter Gumbel
November 7, 2013Germany 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.
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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.
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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...
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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.
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“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 BerlinJosé 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.
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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, 2013BERLIN – 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.
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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.
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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 BoyleAxel 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.
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“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.
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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 peripherySaturday, 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.
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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, 2013The 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.
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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%.”
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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.”
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“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.
Deflation? What deflation?
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:
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:
Well, hopefully stories like this coming out of Germany should be ending soon...
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:
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:
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?
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:
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.
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:
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...
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?
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:
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:
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.
One nation, under “the market”, indivisible with an interstate race to the bottom for all:
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?
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:
When you read things like:
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:
“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...
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.
Watch out for falling pigs. Some of them may have started flying:
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:
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?
Just in case anyone forgot who runs the eurozone, here’s a reminder:
“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:
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:
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:
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:
So a lagging economy is now being used as an excuse to knee cap unions’ ability to negotiate higher wages in Germany. How convenient.
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:
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.
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:
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:
“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.
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:
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.
Look at what you’ve become SPD, look at what you’ve become!
Put the economic mad science away SPD. PLEASE. It’s going to destroy you. And others.
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:
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...
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.
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:
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!
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:
“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:
“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:
“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.
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 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:
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.
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:
“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:
“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:
“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:
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.
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:
“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-tank — and 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’:
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:
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:
“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:
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
“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.