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I don't think though, that the euro can be considered an anti-labour project, not more than floating currencies can be anti-labour when they react to irresponsible wage increases.

The euro has got these huge problems for a simple reason: salaries rose far too quickly in the periphery and far too slowly in Germany. At least that is true when we speak of Spain and Ireland as the periphery: Greece is another matter.

Many people have argued that for a common monetary policy to work, we also need a common fiscal policy. I think this might be a bit too far: it would be enough on one hand if governments pursued respoinsible fiscal policy according to some regulatory framework, a bit like the Stability pact except not insane. Furthermore and more importantly, we do need some coordinated mechanism for collective wage bargaining, so we can make sure the Germans don't undercut everyone else and the Spaniards don't increase their salaries too quickly.

What we need is a pragmatic European joint labour movement. The main problem with this is that labour unions are built on solidarity and hence on identity, and because of that has a national basis. My experience is that national unions mainly fight each other rather than stand together against employers (for example in the SAAB Trollhättan vs. Rüsselsheim fight some years back).

So we might actually need some wage correction mechanism built not on labour unions if that proves unworkable, but on central EU institutions. These are, however, mired and marinated in a particularly stupid brand of neoliberalism. Top that with the the fact that if labour unions will not want to cede any power to a central European labour union, they will certainly cry foul over ceding power to the Comission or some other EU authority. And as things stand, they shouldn't...

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Dec 24th, 2010 at 05:30:57 AM EST
The root of all evil in the Eurozone is the internal trade imbalances and the refusal to introduce corrective feedback loops. This is the same mistake made at Bretton Woods, and for the same reason: the largest economy and largest exporter putting itself at the centre of a fixed-exchange-rate system with no correction of trade balances.

If you couple structural trade balances and fixed exchange rates with the GSP's government deficit limits, you end up with huge pressure to increase private debt in net importers. Hence the credit bubbles in the periphery funded by credit from the core. This is inevitable. Otherwise you have a depression in the periphery as in fact it was not rising incomes that fuelled demand, but rising indebtedness.

In the meantime, the core country depressed real wages, ran higher public deficits and debts than the periphery, and cut social benefits. Meaning all the growth in the Eurozone went to returns on capital in the core country.

Eventually, something has to give, and it has.

So, what's the policy proposal to get us out the hole? To keep digging, apparently.

Contractive monetary policy to stave off non-existent invisible inflation monsters, retain the GSP, don't punish the core for its now excessive debt (now as well as over the last 10 years) but punish the periphery for its "automatic stabilizer" deficits (the same "automatic stabilizers" that were used as an excuse for smaller monetary expansion in Europe compared with the US). Refuse to introcude negative feedbacks in trade imbalances. Force deficit countries to accept IMF-style "rescues" rather than default on its debts to the core.

Brilliant.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Fri Dec 24th, 2010 at 06:12:48 AM EST
[ Parent ]
Why is this? Why can't surplus core capital go somewhere else than into peripheral country debt (private or public)? Why can't it instead go into peripheral country equity, or outside the eurozone?

And why must debt explode in the peripheral countries with trade deficits? Why can't they instead reduce their equity holdings, or reduce their imports from the core?

These are not rhetorical questions: I really don't understand this, and ET discussion threads are the best seminar room I've ever been to. Lots of great stuff I've never been exposed to in ordinary seminar rooms. :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Dec 24th, 2010 at 06:39:38 AM EST
[ Parent ]
And they are good questions to chew on.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Dec 24th, 2010 at 06:41:32 AM EST
[ Parent ]
Why is this? Why can't surplus core capital go somewhere else than into peripheral country debt (private or public)? Why can't it instead go into peripheral country equity,

There's basically four ways that could happen. Spanish firms could sell equity they hold in German firms. German firms can offshore production to Spain. German venture capitalists can seek to exploit promising business niches in Spain. Or German firms can buy equity stakes in Spanish firms.

The first option isn't really an option, because Spanish firms have no major equity stake in the German economy. And even if they had, why would they be inclined to sell it unless they were forced to? Shareholders in German firms have been the big winners in German policy.

Offshoring to Spain isn't going to happen either, for a couple of reasons. In the first place, any firm that is going to offshore is going to offshore to Eastern Europe or China. In the second place, the German reaction to offshoring would be to further depress domestic demand, further deflate prices and thereby force any business offshored to a €-zone country that was not prepared to follow Germany in a race to the bottom back into the fold.

And the problem for German venture capital seeking gains in Spain is that local Spanish investors are going to have an easier job of finding the good investments than ones operating out of Frankfurt.

Could German firms have obtained an equity stake in Spanish firms instead of lending Spain money? Obviously they could. And they probably did. But that isn't very much of an improvement - laundering the surplus into the secondary equity market would just be fuelling a stock market bubble instead of a real estate bubble.

By contrast, the way the debt was issued was that local Spanish banks made loans to Spanish households and businesses. The Spanish banks then went on the interbank market and borrowed regulatory reserves from German banks. Spanish households and firms then spent money back to Germany, forcing Spanish banks to borrow even more on from the German banks on the interbank market. Lending to other €-zone banks on the interbank market is virtually automatic, particularly when it is an interbank loan to cover a deposit transfer.

or outside the eurozone?

Because there is an intra-€-zone trade imbalance. If the surplus went out of the €-zone, the deficit countries would have to start borrowing outside the €-zone as well. Which would reduce to the current situation, but with a Chinese middleman between Germany and Spain.

Of course that might be politically easier, since you could then screw over the foreign middleman, rather than deal with the imbalances as a matter of internal policy. But I suspect that there's an upper limit to how long foreigners are willing to accept getting screwed over for the sake of internal €-zone cohesion.

And why must debt explode in the peripheral countries with trade deficits? Why can't they instead reduce their equity holdings,

In order to do that, surplus countries have to buy their equity. So this is simply a mirror image of your first question.

or reduce their imports from the core?

This one's actually the easiest question to answer.

All economic activity involves a proportion of imports. The precise proportion depends on how your economy works - what sort of raw materials you have, what sort of stuff you make, how your institutional structures are set up, that sort of stuff.

Reducing the percentage of your economic activity that depends on imports is hard, and takes time. One of the easiest ways to do it is to devalue your currency, but that option wasn't available. The second easiest option is to do hands-on import substitution policy. But that's illegal under EU rules.

So with no really desirable options for reducing import share, the only way to reduce total imports is to reduce domestic economic activity. That is, create an artificial business depression.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Dec 25th, 2010 at 05:01:53 PM EST
[ Parent ]
Plus, after Bretton Woods the US engaged in a massive programme of industrialization of Germany, the Marshall plan. They could just as well have said "we'll keep our surplus and you pull yourself up by your bootstraps". Or, even better, they could have implemented the Morgenthau Plan and actively deindustrialised Germany to turn it into an agrarian backwater.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Dec 24th, 2010 at 07:03:22 AM EST
[ Parent ]
As Germany has shown time and again, real wages can be pushed down without touching the unions. Instead conditions surrounding the labour market (Harz) has been worsened increasing the cost for the individual of unemployment, thus lowering the will to fight for higher wages.

So without touching the unions, the reverse could be implemented. Government could again be acting as employer of last resort (making sure if you can work you have a job). In effect abandoning the current policy of mandatory unemployment. Generous and secure social benefits for those unable to work could be reinstated.

However that does not solve everything. At the same time, EU has a common currency (means no automatic adjustment of productivity), and a common market for capital and labour (no legal barriers for capital and labour to move). Unless the periphery is to be depopulated (which will be rough on the population of periphery and core alike), there needs to be a cash flow to the periphery to compensate for the advantages of the core. This could be in different forms and may or may not include a policy for the periphery to catch up. But it is hard to see without some federal treasury.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Dec 24th, 2010 at 06:38:46 AM EST
[ Parent ]
This could be in different forms and may or may not include a policy for the periphery to catch up. But it is hard to see without some federal treasury.

Why is that? Peripheral dirt poor countries have shown themselves to be able to do just that, without requiring aid from some foreign federal treasury. Even without being able to run a weak currency either, as we had the gold standard back then.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Dec 24th, 2010 at 06:46:03 AM EST
[ Parent ]
They didn't have the EU's "illegal state rules" stacked against them.

Remember the EU-mandated closure of the Croatian shipyards?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Fri Dec 24th, 2010 at 06:49:22 AM EST
[ Parent ]
On the other hand they didn't have massive EU transfer payments either, even if trade was as free and liberalised as it is today, if not even more (basically I'm talking about something like the 1830-1920 period here).

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Dec 24th, 2010 at 06:53:25 AM EST
[ Parent ]
trade was as free and liberalised as it is today, if not even more

What? No tariffs? No state funding of industry? Free cross-border movement of capital?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Fri Dec 24th, 2010 at 06:57:17 AM EST
[ Parent ]
And of people too...

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Dec 24th, 2010 at 10:02:49 AM EST
[ Parent ]
Pretty much, yes.

Of course there's a couple of differences too. The most important difference is that Scandinavian economies at the time were not credit economies. Deflation is a problem in a credit economy because it provides unpredictable windfall transfers from debtors to creditors. Deflation in a pre-credit economy isn't much of a problem, because the volume of debtors is not very great, and creditors have already priced in a high default risk.

And indeed the tether to the gold standard involved deflationary periods, and those deflationary periods caused defaults - sometimes even sovereign defaults. But if you have defaults on the same scale (relative to the size of the monetary part of the economy) in a fully monetary economy you'd break it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Dec 25th, 2010 at 05:11:49 PM EST
[ Parent ]
I can't speak for the other Scandinavian countries, but for Sweden credit played a huge role in the industrialisation, especially from 1890's and forward. Before that local businessmen and local banks were more or less the same thing and had large amounts of co-ownership and insider loans. Due to the social conventions of the time (even after the limited liability corporation was introduced in the 1840's), this was no problem as default was the same thing as social suicide, a horrible almost sinful thing.

But as the 19th century drew to a close, the face of Swedish industry started changing, away from things like textile mills and basic manufacturing. Instead the Swedish economy turned into a raw material play: iron and timber, and then these thing were refined, into steel, pulp and matches. This meant immense capital intensity and start-up costs, which just couldn't be borne by local businessmen/bankers, nor could it be financed with cashflow from existsing companies.

So yes, Sweden was certainly a credit economy already a 100 years ago.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sun Dec 26th, 2010 at 01:44:34 PM EST
[ Parent ]
It is more accurate to say that Sweden (like Denmark) became a credit economy 100 years ago, as part of the process of industrialising. Moreover, most households did not have mortgages on purely residential property even by the end of the period.

If they had started out as a credit economy, in which every business and almost all households had non-negligible liabilities, the deflationary bias inherent in the gold standard would have been a much greater drag on the industrialisation process.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Dec 26th, 2010 at 02:09:29 PM EST
[ Parent ]
I was more thinking of how a country works with core and periphery.

As to why the peripheral countries can not imitate what happened around 1900, I am not sure, but I would note the following clues:

  1. There was a depopulation of the peripheral countries, but in the middle of a population boom. The move mostly went outside Europe in search for cheap land.
  2. Regulatory freedom existed on another level. No EU rules, no WTO rules, few conventions. Peripheral countries could and did shamelessly copy everything found worth copying. Lars Magnus Ericsson founded an empire on copying the telephone.
  3. Not all peripheral countries industrialised in 1830-1920. Which did except Sweden? Switzerland? Netherlands and other colonial powers were the core of their own systems.


Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Sat Dec 25th, 2010 at 11:28:55 AM EST
[ Parent ]
Pretty much all of Scandinavia industrialised between 1870 and 1914. That's where the big catch-up happened for Germany as well.

And indeed intellectual property laws were, back then, usually purely national, as opposed to the gawds-awful TRIP nonsense that the last WTO round foisted upon us. So tech transfer was much faster and easier for an open economy.

Another point is that the industrial game is simply different today than it was at the previous turn of the century. Except in railroad engineering, the initial capital cost was much lower - well within reach of a handful of business associates with favourable credit records. Today, five lower upper class entrepreneurs couldn't buy a fully modern factory, nevermind staff it long enough to get the first production run finished.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Dec 25th, 2010 at 05:17:06 PM EST
[ Parent ]
The euro has got these huge problems for a simple reason: salaries rose far too quickly in the periphery and far too slowly in Germany. At least that is true when we speak of Spain and Ireland as the periphery:

Salaries rise when house prices rise. Adam Smith said that wages must inevitably rise when the necessary living costs rise. The problem of Europe is high economic rent. Too much credit, unproductive loans and household debt, low or non-existent land tax, large monopoly profits. Competitive economy has a low economic rent. That is what competitiveness is. Banana republics (like eurozone?) have a large one. Labour and industries are punished, privileges rewarded. The German surplus, unproductive credit and debt was directed to peripherals not to Germany. And now Germany and neoliberals cannot accept the fact that german banks have destroyed the wealth of german savings, their labour and industry.

by kjr63 on Fri Dec 24th, 2010 at 06:40:10 AM EST
[ Parent ]
kjr63:
Germany and neoliberals cannot accept the fact that german banks have destroyed the wealth of german savings
It's a game of chicken, and all the high-fallutin' rhetoric about crickets and ants is so much jingoistic bullshit to rally the faithful. It's an open secret that the German banks are insolvent, actually:

Eurointelligence.com: Harsh winter threatens economic recovery

One camp - that includes the European Commisison - wants another "even better" stress test, the other one does not want a stress test at all, on the grounds that this would disquiet financial markets. The German government and the Bundesbank are firmly in the latter category. (They don't want proper stress test on the grounds that the de-facto insolvency of the German banking system would be recognised if you applied some realistic stress scenarios. What is not clear to us is whether the advocates of tougher stress tests want a more honest appraisal of the banking system, or whether they want to be given a second chance at cheating. In any case, we are not holding our breath.)
(and this is from mostly German economists around the FT's Walter Münchau)

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Dec 24th, 2010 at 06:48:13 AM EST
[ Parent ]
Salaries rise when house prices rise.

Yes, just look at the US. :P

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Fri Dec 24th, 2010 at 06:49:22 AM EST
[ Parent ]

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