Why aren’t there negotiations on a Eurozone Social Accord?

A great imbalance is visible in the Eurozone. Wages in Southern-Europe are collectively too high in comparison with the North. This is the gist of the economic problems with the Euro. The standard solution for this kind of co-ordination problems in Northern European countries was to restore the balances in a Social Accord between politicians, employers and unions. Such a solution is now needed on the scale of the Eurozone, but the social partners have been very, very silent for years. Why isn’t this route tried? Have Europeans suddenly forgotten their traditions and solutions?

The Eurozone in its current set-up is modelled quite like the German and Dutch institutional framework. A Stability and Growth Pact was agreed on, where governments promised to keep their fiscal budgets in check, the ECB would limit itself to keep inflation low and the financial system stable. These are two of three main elements of a political-economic ordering that is known as Sozial-Marktwirtschaft in Germany and Poldermodel in the Netherlands. In the economic literature it is called ORDO-Liberalism.

The third main element in this framework is the joint responsibility of Employers and Workers in macro-economic affairs. If the intention is to keep the Eurozone alive and restart growth, then such a Eurozone Social Accord is needed.

How should such an Accord look like? Roughly a raise in wages in Northern-Europe, wage restraint and productivity increases in Southern Europe. Making the labour market more flexible in those countries helps and produces more jobs. That was the lesson of the  Dutch (Wassenaar Accords, 1980s), Scandinavian and German (Hartz IV, 2000s) experiences.

But the gap between wages that has to be created again is considerable. It probably has to run up to 20% in a few years to restore competitiveness in Southern-Europe to a reasonable level.

With a slight internal revaluation in the north a state debt below 60% of GDP becomes a manageable goal. One increases the denominator with nominal wage increases across an economy. Also budget deficits could be reduced by not raising tax franchises / tresholds too much.

A rising wage across the board in Northern Europe, however would be responded to with labour saving investments. That would bring positive results for the automation and IT-industry and machine manufacturing. A stimulus to the German economy. In countries like the Netherlands and Ireland mortgage burdens for home owners and rents will be easier to bear. Banks with large mortgage portfolios will not see their rating threatened and the currently locked-down home market will revive.

The current silence is strange, because a Eurozone Social Accord can be accomplished within the current EU-treaties. It is a far less extreme solution than giving non-elected ECB-bankers a dual mandate (both inflation and employment goals, like the Federal Reserve has), issue Eurobonds or other financial “magic wands”, while this solves the real economic question that plagues the Eurozone.

I have asked around among German and Dutch politicians and economists, why there isn’t an effort made along this approach, and I received surprising answers.

A Dutch politician pointed at the negative impact on export markets to Southern Europe, when Northern countries raise salaries. In a different way this point was already made by the Dutch Employers Association’s President Wientjes. But then as a warning against breaking up the Euro. Vanishing export markets are serious. But let’s be really serious. Anyone who today knocks on the door of an Investor with a business plan to export to Southern-Europe, would receive the kind advice to come-back later. Also continuing the current policies, would also destroy most of the sales markets in those countries, due to large unemployment and sizeable government austerity.

Some Germans pointed at inflation, but in particular to the point that they shouldn’t be expected to launch this effort, because they feared it would be perceived as a German Diktat. But they also understood that a Eurozone Social Accord enabled governments the broad support to “sell” it to their electorate.

This attitude from German offers in my view the Dutch government a chance for meaningful and productive initiative, away from the sideline in the current Merkozy dominated act. It also would be very obvious in the Dutch interest to start pushing for such a solution, because a European Social Accord would stabilise the Eurozone and offer new perspective.

However, acting on this chance requires not only a rough consensus among many in the Netherlands to try this approach (that might be feasible, my soundings went through all parties from left to right). But it requires first and foremost (diplomatic) mission work among their peer-organisations from political parties, employers and unions. In particular their peers in Germany and France and the Southern European countries.

Aren’t there any losers, except those exporters to Southern Europe? Sure, but for instance the impact on Pension funds could be reduced with complementary policy, such as removing restrictions to put a larger part of their portfolio into shares.

After the change of guard from government leaders in Southern-Europe and the agreement of stricter budget discipline, now the time seems to have come to create some breathing space for Southern European companies in Northern markets. This as a “carrot” in a rebalancing path of nominal wage rises traded for labour market and productivity enhancing reforms. This looks sufficiently targeted to be generally understood and monitored in complaince.

A welcome by-effect is that this approach would remove the wind from the sails of populist politicians from both the left and the right. It also indicates that the political centre isn’t powerless and out of policy options.

Early december, an alarmist “open letter” was written by the CEOs of the largest Dutch Multinationals to the Dutch Government to save the Eurozone.  The last time such a joint letter was written was in 1976, to warn about the destructive economic effect of “Dutch Disease”. If they are serious, they would not stop now and instead contact their peers at the European Round Table and create a negotiation delegation to explore this route with Unions. And the Unions? One should think they might consider working a bit on International Solidarity a good idea.

Or is this path suddenly impossible? In that case, Europe is in real trouble, because that implies not only a financial and economic crisis, but a social systems crisis.

Hendrik Rood is Investment Director at Stratix in The Netherlands


A society has a choice after a major financial crash to either opt for a “Gilded Age” vs a “Golden Age”. Many politicians but also a large number of financial-economic analysts often display the bad habit of Karl Marx: present a single scenario and emphasise the outcome as “the only option” or stating a policy proposal as “There Is No Alternative”.

A major crises results in efforts to transform the institutional arrangements. Those countries/regions that make a swift transition will grow into economic dominance in the next few decades.

A very good analysis of this returning sways after major crises was published in 2002 by Carlota Perez: Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages.

In the past those countries that, due to political influences, decide to continue the institutional arrangements that benefit Financial Capital experienced a Gilded Age with a highly uneven income distribution: a Rentier State, with stagnation and slow decline, instead of a Golden Age that would foster the Real Economy and economic dynamism with new entrants and entrepreneurs.

The key point is that the choice to emphasise a specific set of institutional arrangements are political choices and strongly depend on political power by interest groups in democracies. Mistakes have been made in the past centuries.

This was a editor high-lighted comment on a New York Times column by Paul Krugman:

Rule by Rentiers (comment)
It becomes more and more obvious that the political climate in the USA is starting to resemble that of the Dutch Republic after 1713 (the Spanish War of Succession) or the one in England at the end of the 19th century.

The Dutch Republic was the first country that has implemented a Liberal Capitalist economy with government bonds loaned by the rich part of the population, a central bank, a stock market and pensions. The prototype of today’s western system of capitalism. This type of political-economy was exported to the United Kingdom in 1688 (the Dutch invasion of London which the English call the Glorious Revolution).

When one has two countries, one with a large wealthy upper class and another eager to engage in catch up development where in both roughly stable Liberal Capitalism systems are created, one will observe a flow of investment funds from the rich in the developed country to projects in the less developed country.

The precondition is one needs stable governments, that guarantee a low risk of outside investors being expropriated from their money, to get this flow of funds going.

Paying interest on the large government debts due to War efforts resulted in the Dutch Republic become a wealthy country run by Regents for Rentiers with a one-and-half century of stagnation, where high taxes were imposed on the lower classes that were used to pay for the interest on the government bonds that paid out the Rentiers.

Those bonds were reinvested by the Regent families in the UK which was a main source of funding for the English Industrial Revolution. Stagnation in the Dutch Republic incurred as hardly any new daring entrepreneurial efforts were funded after 1713. An attempt of reform by the Patriot revolution failed in the 1780s, a Patriot liberation movement aided by France in 1795 resulted in Napoleon getting access to the Amsterdam cash mountains to finance his wars. After Waterloo the Conservatives restored the systems and only after 1848 when Liberals took power and rewrote the Constitution the stagnation ended in The Netherlands.

The decline of the British Empire started in the late 19th century when the USA and Germany rose with a more or less similar pattern. Investing outside your own country, as opportunities elsewhere looked better.

Britain has observed a century of decline and reduction of industrialisation now, just like the Dutch Republic from 1713 – 1849. Britain has seen only occassional economic upswings when the financial sector was expanding and caused some spill-over effects.

Currently Asian countries begin to take over the role England had for the rich investors of the 18th century Dutch Republic and the USA had for British wealthy investors at the end of the 19th century.

The key economic point isn’t that the economy stagnates as money is transferred to a wealthy upper class via bonds, but that the owners/managers of those funds that receive the rents do not engage in investments that improve the living conditions and business climate in their own country, but instead “spread their risk” to invest around the world in search for countries with stable governments, low expropriation risks and higher returns. The latter are high returns to themselves and not to the other people in their country. People in the other country they invest in do get jobs, new infrastructure etc. Some of the locals will grasp and learn the tricks and found their own companies and often do better, as they understand their country and demands better.

Investing money from bonds outside their own country is only an attractive option for wealthy investors, when they can count on interests from bonds flowing into their coffins and do not face a high expropriation risk of their money in their own country, either by inflation or by progressive taxes or even a revolutionary movement.

Election of a political class that keeps that risk of “home expropriation” down, while preserving the monetary value of accrued assets is thus key.

As a final comment. The provincial administration leaders of the Dutch Republic were called Pensionaries and the political leader was called Grand Pensionary. What’s in a Name …

For those who have followed the credit crisis, it is becoming clear that the western world is on it’s way to do a mass nationalisation of the banking industry. That will save quite some jobs, and hit investors, as their shares in many banks become worthless. But it is also an effective “Greenspan put” on reckless financial behaviour. Will financiers learn from it?

A second effect will be that governments absorb “toxic waste” in those financial institutions. They may split the nationalised banks in a healthy part and a mortuarium bank, containing the toxic waste, and in a few years bring the healthy parts back to the stock market, or sell them to other banks. The end result is thus that taxpayers end up with the “toxic waste” and only may hope for the best.

The prime motive to nationalise the banks, insurers and other financial institutions, seems to be that they are “too big to fail”. The logical conclusion then is, that a healthy financial system should contain far more and much smaller banks. A non-interventionist approach would create a flurry of defaults and a break-up in parts of the major players, who sell out their subsidiaries and divisions to raise money. Nationalisation blocks that restructuring process, at most one get a political decision to scale down some of the big firms.

A different approach might be that governments do not engage in “saving the system”, but instead create more redundancy and more resilience in the system, by establishing new banks, that are on a sound financial footing and legislate that in two or three years the shares in those new banks will be given to the taxpayers.

Those new banks could start frome a clean slate. Setting up an Internet banking portal with modern IT and without any legacy. Also, if they want to be in the bricks-and-mortar business, now, during an economic crisis, is the time to rent offices and retail space on the cheap with multiyear contracts.

Off course, creating such banks requires some time, but with massive layoffs and bankruptcies in the financial industry, populating their workforce with qualified workers will be rather easy. As an employer the new bank can establish labour contracts with more normal remuneration and bonus programs.

When the general public trusts these new entities and mistrusts their current bank, there will be a rapid shift of accounts to these new entities. This has a major beneficial effect, that it is exactly the opposite of the “Greenspan put” and a well functioning bank with normal remunerations has a strong disciplinary effect on salaries in existing banks.

The trusted new banks can have their IPO in a few years. E.g. the government can sell 10% of the stock on the market and put the proceeds in the bank as additional capital, while distributing 90% of the shares among the taxpayers. They then can decide to hold their shares or sell them on the stock market.

When the general public does not trust these new sound banks, the existing banks will continue to function with large market shares. As that occurs, investors are reassured that the existing players are competitive and can take a more fundamental and long term view on their viability.

Creating sound new banks and putting them on the market, is like creating an entity that constitutes the Tobin-Q for the financial industry in practice. We have seen that after the 2000-2001 Internet and Telecom crash, the assets of the failed companies were often snapped up at valuations far below their Tobin-Q. The problem with banks and financial institutions is that their main asset today is trust, a non-physical entity. So the ultimate policy issue is to re-establish a value on what constitutes a trusted bank.

Governments who have nationalised their banks, will have to think through how to privatise them in a few years from now. Existing banks are however institutions loaded with legacies in organisational culture as well as old IT. People in these banks now experience the “Greenspan put” as they have been saved.

There is a huge risk that due to broad stroke policy deals with various stakeholders, we only get the return of existing entities, or even worse, a far more concentrated market as policy makers start to create “new big entities” by merging banks. That is effectively a new bank that is even more prone to be considered “too big to fail”. It might also be an attempt to gain some additional profits for the state in the prospective IPO from a more concentrated market, e.g. creating a few national champion.

Anyone who studied a bit the functioning of oligarchic markets would grasp that a privatisation of national champions constitutes another burden on the average citizen as well as businesses in the non-financial economy. Sound and save banks, but less banks, may provide the optical illusion of refound stability, due to a more concentrated oligopoly, but comes at a very substantive long run cost to the average citizen. It relaunches inefficient institutions, while providing less choice and does not confront the people who work inside those businesses with more competition.

The purpose of this first blog entry was to sketch an alternative that is not yet on the policy tables of people who discuss the future of the banking industry. It is meant to sketch a pro-competitive approach that goes to the heart of the problem, the fact that there are too many banks that are considered “system banks” and “too large to fail”.
There is a huge risk that politicians, after they have nationalised their banks, will proceed in an anti-competitive mode.

The genuine economic problem of the financial sector today is that they do compete, but are “too protected”. This has allowed them not only to take too much risk, but also to pump up staff salaries far above other sectors of industries and collect a much larger share of our societies’ economic rents than justified by their contribution in a hypothetical unregulated world, where they had to take all risks into account and would not be able to rely on a “Greenspan put”.

Regulatory protection also allowed them to hire a lot of talented people from other sectors of society e.g. math, physics and computer scientists, who would otherwise be working in the science and technology intensive sectors on very different innovations for humanity. The social and economic burden of the regulated financial sector is grossly underestimated.

Since 1990 the first job salaries of economics and business administration majors have grown much faster than those of other academics and in particular engineering and science majors. As people with academic degrees are not stupid, a substantive number of them has switched carreers to the financial sector.

In 2004 a group of economists at the Netherlands Bureau for Economic Policy Analysis misinterpreted the growing salary gap between economists and people with science and technology degrees. They did rightly observe that science and technology jobs experienced more competitive pressure from India and China (ICT is now known as an abbreviation for India and China Technologies). They misinterpreted however the decision to switch to the financial sector by many with good math and calculative skills. This was due to overprotection and screening from competition in those financial industries, resulting in finance specialists experiencing a too low risk of losing their job, while taking in an above long run average amount of gross economic profits.

It is now wise for economists to do a thorough introspection whether they did not had a blind spot for the failings of the industry most close to their profession and prescribe to the financial sector the same medicine, they have recommended for many technology driven industries: more competition and breaking up of monopolies and tight oligopolies.