General


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)
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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 …