No 363 Posted by fw, December 13, 2011
“I think it’s extremely dangerous. We should not take democracy as something natural or given. If you look at southern Europe people are on the streets every day. The riots are getting harder to fight and the governments really do not know what to do anymore. So if you put people into such a situation where they’re really desperate about their outlook, where they’re desperate about their kids’ future, and so on, then people are doing things that might look quite unreasonable but it’s just a result of their desperation. And so far I think G20 could be the forum to act but in a more rigorous and a totally different way. I have been following G20 in the last year and it was unfortunately a very bureaucratic affair. I would hope that the leaders come together one more time and to see that they need a bigger approach, a broader approach. And they have to face not only some minor economic questions but they’re facing a big challenging century, a question of a century in terms of overall politics.” —Dr Heiner Flassbeck, Director, Globalization and Development Strategies, United Nations Conference on Trade and Development (UNCTAD)
In a Real News interview, Eurocrisis: Democracy is Not a Given, Dr Heiner Flassbeck talks about the European Union Summit agreement of September 9, 2011, and the Eurocrisis that precipitated it. He concludes that the German policy of low wages and beggar-thy-neighbour remedies is the root cause of the crisis. This latest agreement, concocted by Sarkozy and Merkel, has not resolved the crisis. We have reached a point, as Flassbeck says in the above passage, where “We should not take democracy as something natural or given.”
Watch a video of the interview here, followed by my transcript with added subheadings and links. As Woody Allen said about accountants, in one of his movies, “They have a language all their own.” So, too, do economists. Much of the Flassbeck interview is heavy slogging, with a relatively long historical account of wage developments, replete with economic jargon. Viewers and readers may prefer to skim through to the second half of the interview – the last 5 or so paragraphs of the transcript – which focuses on the impact of the flawed summit agreement.
Eurocrisis: Democracy is Not a Given, Real News interview with Dr Heiner Flassbeck, December 10, 2011.
“More austerity for Europe” that’s a major implication of the Dec 9, 2011 European Union Summit agreement
Well this agreement first of all is about more austerity for Europe. It’s an agreement that more or less all the countries in the Eurozone, and some others, are going for more austerity, are going to cut down public expenditure, and that they are going to try to improve what they call, improve the competitiveness. But that means wage cuts.
The core of the Eurozone dilemma is the divergence of wage development between Germany and southern Europe
Well I think the rule of this crisis is not a violation of rules of fiscal discipline, of degrees of public debt in the Eurozone, different degrees of public debt. What I think is the core of the issue is the divergence of wage development. Unit labor costs have diverged dramatically in the last ten years. They did not follow the commonly agreed inflation target in Europe. On the one hand southern Europe went beyond this inflation target of 2% but, more so, Germany went below this target by a very wide margin and this has led to an overall gap in competitiveness inside the Eurozone where you cannot depreciate or appreciate anymore of something like 25% between Germany and southern Europe and 20% between Germany and France.
Wage cutting and pressure on unions, designed to reduce unemployment, have failed dramatically
It was dramatic pressure, political pressure on the unions, on wage agreements that we had never before [seen] in Germany. First of all it started at the end of the 90s with a tripartite agreement between government, unions and employer associations. But then on top of that the red-green – paradoxically, the red-green government – put another big round of pressure on the unions by restricting the possibility to negotiate certain wages for low skilled by reducing unemployment contributions and so on. So in that way, wage flexibility has decreased dramatically. It was part of the program that everybody called “labor market increase”, your labor market flexibility, and that is exactly what is asked for now from the other Europeans.
That was the idea. They had clearly what we economists call a neoclassical approach. They tried to improve employment by wage cutting and pressure on the wage negotiations. But it dramatically failed in terms of the domestic markets. It dramatically failed. The only thing that happened, and that could be expected by all reasonable economists would have expected, that if you go into a currency union at the same time the other countries will have no chance to depreciate their currencies. Well, the end is that you beggar your neighbours and that is exactly what happened. So we have huge current accounts of business in Germany and huge current account deficits in the other countries. The unfortunate thing is that we cannot correct it anymore by exchange rate changes.
Overall it failed. It benefitted only the export industry, that’s right. And a certain kind of elite, that’s right also. But overall, German growth was weak. Over the time Germany, in the first ten years in the Eurozone was the worst country in terms of growth and in terms of employment. But only, if you do something like that, you know the increase, the improvement in competitiveness accumulates over time. So you start with say a difference of 2% and after 10 years you have, as I say, 25%. So under these conditions you have 25% premium over your competitors, over the other countries, then the increase, the benefits that you get in the export industry are accelerating and this is why Germany at the end was extremely strong and the others extremely weak.
Without radical policy changes in Europe and the U.S. we’re headed for deflation and stagflation
I think the most probable outcome that we are facing now, not only in Europe but in the United States and in Japan is something like the Japanese two lost decades that started at the beginning of the 90s because we’re heading for a deflation clearly, a deflation in Europe, and stagnation, because wages are not rising anymore. Wages are cut in the south and in Germany they’re not rising very much. That leads immediately to faltering domestic demand. On the export side we cannot expect very much from, as I said, the United States and Japan and China cannot do it alone. So we’re really in a trap that will not . . . you will not be able to escape if you do not [have] radical changes over our policies in Europe and, maybe, in the United States.
“The majority of political leaders really do not understand”
Well, it’s not benefitting and I think they really do not understand — some may understand — but the majority of the political leaders I think really do not understand. And Germany, to be frank, people are talking all the time about the Swabian housewife, which means you do not spend too much. You’re saving a lot of your income. And this is the model for our policies so they take a micro-model for the macro economy and they do not understand that the macro economy is functioning in a totally different way. So it’s not just about who benefits or not. The core of it in my view is economists, the majority of economists, the mainstream in economics, strongly believe that saving is a good thing. And they do not understand the kind of Keynesian restriction or the Keynesian argument against this saving approach. And, more important, is that all good economists, as they say, on earth, believe that wage flexibility is a good thing and they do not understand fully that wage flexibility first of all leads to falling demand and not in the first round to rising employment. So you have a demand restriction, you have a demand constraint and that demand constraint will be very difficult to overcome. I mean look at the discussion in the United States. It’s quite similar to the European discussion. The people really do not take care of the very low wages of the family income expectations that are, as far as I see it, at the lowest level in the United States ever. And to overcome this you need a huge fiscal stimulus, and even that may not be possible. And this is exactly an analogy to the Japanese, the beginning of the Japanese two last decades.
We are in an age of diminished expectations, a totally new experience for capitalism
I think you need a mixture, you need a reasonable mixture. You need stimulus from the government side but given the political opposition against further stimuli you need in addition something like an incomes policy or at least more freedom to unite for the workers to do what is necessary. But you see the point is, in the United States, if unemployment is higher — and that was the case in the beginning of this century in Germany also – if unemployment is high it’s very difficult to negotiate for higher wages. Then the government has to give a strong signal either through minimum wages or other instruments, say wages in the public sector, so to make clear that people can expect that they have their part in the productivity increase in the future. We have a totally new situation, I think, in the capitalist system that we have never seen in 30-40 years before, namely, that we really have an age of diminished expectations, so to say, of the average people. And this diminished expectation, so to say, naturally leads to a stagnative mood and we have to overcome that by a very heterodox, unorthodox instrument. Just monetary policy does not work anymore. Fiscal policy is politically blocked. So you need to think hard about other instruments.
“We should not take democracy as something natural or given”
I think it’s extremely dangerous. We should not take democracy as something natural or given. If you look at southern Europe people are on the streets every day. The riots are getting harder to fight and the governments really do not know what to do anymore. So if you put people into such a situation where they’re really desperate about their outlook, where they’re desperate about their kids’ future, and so on, then people are doing things that might look quite unreasonable but it’s just a result of their desperation.
The time has come for the G20 to act “in a more rigorous, totally different way”
And so far I think G20 could be the forum to act but in a more rigorous and a totally different way. I have been following G20 in the last year and it was unfortunately a very bureaucratic affair. I would hope that the leaders come together one more time and to see that they need a bigger approach, a broader approach. And they have to face not only some minor economic questions but they’re facing a big challenging century, a question of a century in terms of overall politics.
Austerity is not enough. We need political leaders to understand just how serious the situation is
I think they have to realize that the bond holders are not so stupid. If you look at the much-criticized, in Europe, much criticized opinion from Standard and Poor’s this week about the rating of Europe as a whole, the Eurozone as a whole, then Standard and Poor’s has said something quite reasonable. They said just austerity is not enough. So if you just go for austerity then we have to downgrade you because the overall situation is deteriorating. And what was not clearly in the cards last year in the negotiation of the G20 was this dramatic development in the real economy and this has changed the situation. So this should be a wakeup call for everyone to go more serious than ever into negotiations about who could stimulate and who has to do some austerity even at this very critical circumstance. There was a very fruitful discussion at the beginning of last year but it faded away and it didn’t have the political momentum so I very much hope that we will have some political leaders somewhere in the world who will understand how serious the situation really is.
- Eurozone Agreement: Bad For Germany, Bad For The World Seeking Alpha, December 9, 2011 — “Europe is heading for what looks to be at least a 4% contraction in GDP in 2012, and there’s very little chance that this won’t impact the rest of the world, even if it isn’t accompanied by a financial crisis. The U.S. running high single-digit deficits-to-GDP has helped it and the rest of the world, but with China also looking very shaky, the global economy could be squeezed pretty hard between Occidental and Oriental book ends. And if the U.S. gets serious about jumping on the same leaky austerity ship that most of the world is on, watch out.”