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Or how those theories actually work? Why cutting budgets and labour "flexiblity" are essential to monetary unions? How is this explained rather plainly?

I suppose the argument goes something like this: for companies to be competitive, salaries cannot rise much faster than productivity, at least not in the long run. As long as all countries have their own currencies, any refusal to moderate wage growth will be dealt with automatically by the weakening of the currency. With this escape valve blocked by a common currency, painful wage deflation is the only way forward when wages have gone too high, and this road will be easier to walk if labour markets are flexible and the labour force is free to migrate within the currency union.

Indeed, I think that this argument does carry a certain weight: Ireland was getting out of its troubles faster than other peripheral economies, as many economic migrants have gone back to whence they came, and the swiftly falling real wages (="flexible" labour market) have pushed down unit-labour costs, increasing competitivity, saving the trade balance and making the bail-out more or less unecessary.

I think I linked a graph from the FT here, showing this, some weeks ago.

</runs away and hides>

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

by Starvid on Wed Dec 22nd, 2010 at 05:19:01 PM EST
I suppose the argument goes something like this: for companies to be competitive, salaries cannot rise much faster than productivity, at least not in the long run.

That's perfect narrative logic - superficially convincing, but lacking real predictive power or insight.

What if the argument went like this: for companies to be competitive, salaries should be larger to create larger disposable incomes, increase the national tax base and boost both personal and public discretionary spending?

Or like this: for companies to be competitive, shareholder and management compensation should be limited in the short term, to maximise investment and shareholder return in the medium and long term?

Some or all of these could be true. Have they ever been tested?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Dec 22nd, 2010 at 06:31:35 PM EST
[ Parent ]
Competitiveness is a short-run attribute, not a long-run one.

The long-run one is viability as a going concern, which is not the same as "competitiveness".

Price wars are competitive but not viable.

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 Thu Dec 23rd, 2010 at 02:59:33 AM EST
[ Parent ]
"Competitive" is a political synonym for "this will make rich people richer."

Actual competition isn't required, and may be actively discouraged.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Dec 24th, 2010 at 05:12:02 AM EST
[ Parent ]
Maybe in your parlance. What I mean with "competitive" is "being able to sell your products on the international market". Because if you can't do that, your companies will go bust, your tax revenues will collapse, you will have mass unemployment and the welfare state will be cut back. Trust me, I grew up in that kind of a situation.


Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Dec 24th, 2010 at 05:35:14 AM EST
[ Parent ]
Oddly, those things seem to happen anyway, even when companies are "competitive."

See also "race to the bottom", etc.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Dec 24th, 2010 at 05:44:40 AM EST
[ Parent ]
Oh, you mean the process which has lifted hundreds (thousands?) of millions of Asians out of deep poverty during just the last 20 years, while real wage growth has continued in Europe, east, west, south, north and central?

Sure, that has not been the case in the US, but that's not due to any race to the bottom, but due to active political choices made in that particular country to reach that particular result, and that's been going on for almost 40 years now.

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

by Starvid on Fri Dec 24th, 2010 at 05:52:47 AM EST
[ Parent ]
You forget stagnant real wages in Germany, too.

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 06:01:45 AM EST
[ Parent ]
I mentioned them earlier in the thread, but of course you are right. That has however been going on for about one decade, not four. To make myself a bit less popular, I suppose we could partly blame the euro crisis on the apparently useless German labour unions... ;p

Does anyone know why they have accepted this state of affairs?

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

by Starvid on Fri Dec 24th, 2010 at 06:07:18 AM EST
[ Parent ]
Anyway, my point being, these stagnant wages are not the result of any race to the bottom, but a result of active political choices, both in Germany and the US.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Dec 24th, 2010 at 06:09:14 AM EST
[ Parent ]
Actually real income has been stagnant or decreasing in most of the industrialised economies. And where it hasn't, real purchasing power certainly has - because (for example) many Euro economies have had explosive property bubbles.

Meanwhile vast swathes of the former middle class in the US are now unemployed, and are about to lose all government support, because employment in the US sure as hell isn't going to recover any time soon.

So where is the net gain - apart from among the legendary 1% of billionaires who profit the most?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Dec 24th, 2010 at 06:51:08 AM EST
[ Parent ]
Do you have any statistics? It is certainly my impression real wages have gone up a lot in Europe for the last two decades: they certainly have in Sweden and the rest of Scandinavia, and absolutely in all the former WP states. They have exploded in the periphery. They have been flat in Germany for one decade, for political reasons. I have a feeling they have moved up in places like France, Benelux, Austria, Switzerland etc as well.

The US is a political basket case where the middle class has deliberately been squeezed by Goldwaterite crazy movement conservatism for decades, so it's a special case which doesn't apply to Europe as a whole.

Even if this weren't true, I don't think we can just off-hand dismiss the extreme reduction of poverty for a few billion Asians as no "net-gain"...

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

by Starvid on Fri Dec 24th, 2010 at 07:18:46 AM EST
[ Parent ]
Certainly true for Finland. The rise has been quite staggering - I saw the formidable figure of 25%, but that is a useless number without knowing the time period - which I have forgotten.

<goes off to google>

You can't be me, I'm taken

by Sven Triloqvist on Fri Dec 24th, 2010 at 07:26:38 AM EST
[ Parent ]
When the "billions" (really?) of Asians are working for companies like Foxconn, the benefits aren't so difficult to dismiss.

Stats describing wage stagnation have been posted over and over on ET.

And I'll say again - the real numbers have to take into account spending on essentials such as housing. Wages may have exploded at the periphery (compared to what?) but gains are illusory if that increase goes immediately into forced costs.

It's not just the US. In the UK in the 1950s, a large-ish house was an affordable 1.5X of middle class surveyor's salary.

By 2010 the same house is now 17X a middle class surveyor's salary. (This isn't a hypothetical, btw.)

I don't doubt - and I'm not surprised - that somewhat socialist countries like Finland may be doing better than most.

But you won't find them being described as models of competitiveness in the economic press - and certainly not as role models that the US or the other "competitive" Anglo economies can learn from.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Dec 24th, 2010 at 07:36:54 AM EST
[ Parent ]
Even before the well published suicides, Foxconn payed higher salaries and had fewer suicides than other comparable companies in the Chinese coastal provinces. But people like a scapegoat, and then facts aren't always so important.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Fri Dec 24th, 2010 at 08:22:33 AM EST
[ Parent ]
Because the government responsible was Social Democrat?

It's always most effective when neoliberal 'reform' is introduced by the nominal 'center'-"left".

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 10:04:16 AM EST
[ Parent ]
To wit:
On March 14, 2003 Chancellor Gerhard Schröder gave a speech before the German Bundestag outlining the proposed plans for reform. He pointed out three main areas which the agenda would focus on: the economy, the system of social security, and Germany's position on the world market.

The steps to be taken include tax cuts (such as a 25% reduction in the basic rate of income tax) as well as big cuts in the cost absorption for medical treatment and drastic cuts in pension benefits and in unemployment benefits alike. In that, the programme closely resembles similar measures taken earlier in the USA (Reaganomics) and the UK (Thatcherism)[citation needed]. Those measures are also being proposed in accordance with the market liberal approach of the EU's Lisbon Strategy. The name Agenda 2010 itself is a reference to the Lisbon Strategy's 2010 deadline.

The series of changes in the labour market known as Hartz I - IV started in 2003, with the last step, Hartz IV, having come into effect on January 1, 2005. The changes have altered the face of unemployment benefits and job centres in Germany, and the very nature of the German system of social security.



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 10:07:51 AM EST
[ Parent ]
Can't you get into the Yuletide spirit? ;-)

You can't be me, I'm taken
by Sven Triloqvist on Fri Dec 24th, 2010 at 10:12:52 AM EST
[ Parent ]
Spare me the Germanic festival :P

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 10:21:49 AM EST
[ Parent ]
So the Moorish festival is more morose?

You can't be me, I'm taken
by Sven Triloqvist on Fri Dec 24th, 2010 at 11:20:28 AM EST
[ Parent ]
Eat, drink and be merry for tomorrow they foreclose on us?

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 Sat Dec 25th, 2010 at 05:52:28 AM EST
[ Parent ]
What if the argument went like this: for companies to be competitive, salaries should be larger to create larger disposable incomes, increase the national tax base and boost both personal and public discretionary spending?

Not very relevant when you're a small export dependent country, I'm afraid. Only massive countries can create their own demand, if their economy is based on the manufacture of high tech machinery and the products generated by the application of high tech machinery.

Or like this: for companies to be competitive, shareholder and management compensation should be limited in the short term, to maximise investment and shareholder return in the medium and long term?

Witness all long-term viable companies...

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Dec 23rd, 2010 at 04:05:41 PM EST
[ Parent ]
Especially those that are only "viable" with government support.

Which, historically, turns out to be an unexpectedly large number.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Dec 24th, 2010 at 05:14:55 AM EST
[ Parent ]
Yes, well... However can mean many different things. It can mean constant cash transfers from the governement budget to the balance sheets of private corporations. Been there, done that, not good.

It can on the other hand mean productive cooperation between companies, the state and the academic world. It can mean sovereign funding for infrastructure. It can mean all kinds of things done to create a nourishing climate where companies can grow and develop, and where people can do that as well. This kind of support, is often very good. Been there and done that as well.

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

by Starvid on Fri Dec 24th, 2010 at 05:38:41 AM EST
[ Parent ]
Once you get a sovereign involved in any way you no longer have a competitive market - you have political sponsorship.

The sponsorship may not be bad, but clearly, the game is no longer just about "competition" being a self-justifying and self-consistent economic and moral good.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Dec 24th, 2010 at 05:48:48 AM EST
[ Parent ]
Well, then there is no such thing as competitivity, as the sovereign is involved in the running of all states. That is after all the very definition of the state. If you use that definition (a strange one at that, in my mind), the word becomes completely useless and void of meaning. Furthermore, you seem to put some kind of moral value in the word. I do not. To me, being competitive means being able to compete on the international market. No more, no less.

This competitivty can then be boosted by the sovereign in many different ways. Indeedm to be competitive you need the sovereign to create a climate in which business can thrive and be competitive. This includes having a strong educational system, excellent infrastrucutre, reasonable electricity prices, low crime, good healthcare, and so on and so on. History has shown that a high tax environment need not at all be a drag on competivity.

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

by Starvid on Fri Dec 24th, 2010 at 05:58:57 AM EST
[ Parent ]
Furthermore, you seem to put some kind of moral value in the word. I do not.

I'm interested in the propaganda meaning. I don't think the word has any useful economic meaning - although politically it seems to be expedient to pretend that it does.

To me, being competitive means being able to compete on the international market. No more, no less.

Countries are called "competitive" when they promise low wages, low taxes and weak regulation, and are funded by low government spending.

I have never seen the Econo or the FT praising a country for the lavish personal wealth of its worker drones. But I've often seen polemics about the necessity for "reform" and "austerity" to restore "competitiveness."

This includes having a strong educational system, excellent infrastrucutre, reasonable electricity prices, low crime, good healthcare, and so on and so on. History has shown that a high tax environment need not at all be a drag on competivity.

That's very much not the standard definition.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri Dec 24th, 2010 at 07:06:38 AM EST
[ Parent ]
ThatBritGuy:
I have never seen the Econo or the FT praising a country for the lavish personal wealth of its worker drones.
But publishing league tables of millionnaires was par for the course around the peak years of the bubble.

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 07:09:12 AM EST
[ Parent ]
Countries are called "competitive" when they promise low wages, low taxes and weak regulation, and are funded by low government spending.

In Sweden they are... If you read the Swedish business press, some of the main worries and complaints are that the Swedish school system doesn't produce qualified enough workers, and not enough engineers, that there need to be more investment in infrastructure that serves industry, and that something has to be done about the high power prices. There is indeed also talk about how the labour market should be "reformed", but as the current right-wing government considers this a third rail and the export industry doesn't care that much about wages anyway (energy and capital costs are often bigger than costs than salaries for them), nothing ever happens.

That's very much not the standard definition.

It is in Sweden.

If you google "Sweden +competitivity" in Swedish (Sverige +konkurrenskraft) these are three articles you get on the first Google page.

   Sverige mest konkurrenskraftigt i EU
Sverige, Danmark och Finland är enligt WEF bra på innovation och på att anamma ny teknologi. Även satsningar på forskning och utveckling får beröm, samt samarbetet mellan högskolor och näringsliv.

"Sweden most competitive in Europe, due to innovation and being able to use new technology. Also praised for spending on research and development and cooperation bewteen universities and business."

   Utan nya ingenjörer eroderar Sveriges konkurrenskraft

De som besitter dagens ingenjörskompetens går snart i pension. Sveriges riskerar brist på ingenjörer. För att vända trenden måste skola och företag stimulera ungdomars nyfikenhet på teknik och naturvetenskap redan i unga år.

"Wthout new engineers the competitivity of Sweden will erode.
Those who currently have engineering competency will soon retire. Sweden risks lack of engineers. To turn the trend schools and companies stimulare the curiosity of youth for technology and the natural sciences from an early age."

   Sveriges konkurrenskraft har förbättrats
Anledningen till att Sveriges konkurrenskraft förbättrats är att Sverige har mycket transparenta och effektiva offentliga institutioner med minimal korruption och otillbörligt inflytande liksom en regering, som anses vara en av de mest effektiva i världen. Förtroendet för politiker rankas tredje högst i världen.

"The competitivty of Sweden has increased.
The reason why Swedish competitivty has increased is that Sweden has very transparent and efficient publuc authorities with minimal corruption and a government which is seen as one of the most efficient in the world (yes, we are a bit North Korea-style smug at times /Starvid). The trust in politicians is ranked as number three in the world."

I suppose this differing experience of what the concept even means explains a lot of how we approach this discourse from completely different perspectives.

Countries are called "competitive" when they promise low wages, low taxes and weak regulation, and are funded by low government spending.
Ironically, the large tax cuts Sweden has gotten since 2006 haven't much pleased business: they are aimed almost exclusively at the "worker drones", so the result is that workers get fatter wallets (on average about one extra monthly salary every year) and that it becomes cheaper to hire, lowering unemployment (ceteris paribus). Big business, industry, hasn't got much, except a promise that they will be allowed to build new nuclear power plants when the old ones are closed down due to age. Corporate tax has been cut from 28 % to 26.3 %. Whopee for them.

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

by Starvid on Fri Dec 24th, 2010 at 08:20:17 AM EST
[ Parent ]
Ditto Finland, though the influence of Sweden has been decisive.

You can't be me, I'm taken
by Sven Triloqvist on Fri Dec 24th, 2010 at 10:14:02 AM EST
[ Parent ]
I suppose the argument goes something like this: for companies to be competitive, salaries cannot rise much faster than productivity, at least not in the long run. As long as all countries have their own currencies, any refusal to moderate wage growth will be dealt with automatically by the weakening of the currency. With this escape valve blocked by a common currency, painful wage deflation is the only way forward when wages have gone too high

And that would be true under a gold standard, because under a gold standard you cannot simply debase the entire currency system. Under a fiat common currency, however, the alternative policy stance of increasing demand and/or inflation in the low-inflation/low-wage growth economies is becomes viable.

Concluding that flexible labour markets are necessary reflects an anachronistic preference for deflation over inflation.

The - uh - "theory" behind the budget deficit requirement is that budget deficits are supposed to be exogenous, with causality running from the budget position to the price level and current accounts imbalance. Meanwhile in the real world, the usual case is that the current accounts are exogenous, and the causality runs from the current accounts imbalance to the need for public deficits to cover the resulting private sector demand shortfall.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Dec 23rd, 2010 at 02:38:04 AM EST
[ Parent ]
A fiat currency managed under Austrian economics "sound money" principles is like a gold standard. This is what the ECB does.

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 Thu Dec 23rd, 2010 at 03:02:50 AM EST
[ Parent ]
But it is important to understand that this is a policy choice, not a question of being in a currency union. A national economy managed under Austrian "sound money" principles will also be operating on a wannabe gold standard.

There is a conceptual difference between saying "the € project is a bad idea because a common currency forces us to run Austrian economic policy" and saying "the € project is dominated by Austrians, Austrians turn everything they touch to shit, therefore the € project is shit." Because getting rid of the € without getting rid of the Austrians won't get you better economic policy - it'll just turn your economy to shit courtesy of an IMF structural adjustment programme rather than an ECB intervention. And getting rid of the Austrians without getting rid of the € will solve the problem.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Dec 23rd, 2010 at 03:20:29 AM EST
[ Parent ]
To p/n a bit, it's a single currency you're talking about there. A common currency is a different beast.

As we discussed recently, there's nothing under Maastricht to stop a common currency being implemented tomorrow.

It might not be legal tender, but if the credit object is based on something valuable across borders, and uses the € only as a pricing reference (numeraire), there could be a pretty straightforward 'clearing union' solution available.

Eurozone considers new independent funding institution | Business | Deutsche Welle | 23.12.2010

A press report says several European countries including Germany are considering creating a new and independent funding institution to stabilize the euro. But Berlin denies that the plan is official policy. 

Germany is considering a "European stability, growth and investment fund," according to a government paper seen by the Sueddeutsche Zeitung daily. The newspaper said that French Finance Minister Christine Lagarde had called for the 16 eurozone countries to build a strong economic alliance that would explicitly exclude Britain.

Lagarde told the newspaper that London should not be allowed to "hold everyone else up." She also said this "economic government" would have to be consulted if any member state takes a decision that affects the others.

If such a fund were used to invest directly in renewable energy, energy savings and energy infrastructure both throughout and linked to Europe, then the outcome could be a common European currency based on a common 'Energy Pool'.

Then you fix the € as an absolute energy unit, impose a Gesellian charge on positive and negative common currency balances and there's the basis of a new European monetary system.

Domestic european currencies are another story.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Dec 23rd, 2010 at 03:30:38 PM EST
[ Parent ]
Germany is considering a "European stability, growth and investment fund," according to a government paper seen by the Sueddeutsche Zeitung daily.
If such a fund were used to invest directly in renewable energy, energy savings and energy infrastructure both throughout and linked to Europe, then
then we would live in a different universe.

Look here to see what they're actually talking about. There's no "investment" involved. Instead, there's talk of a fund "for the disciplining of member states" with "fatherly severity", and of "like with the IMF", "borrowers relinquishing sovereignty" over the objections of national parliaments. Oh, and borrowers would be required to pledge gold reserves as guarantees, so maybe they actually want to put the Euro on a gold standard.

I despair.

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 10:21:10 AM EST
[ Parent ]
Starvid:
Indeed, I think that this argument does carry a certain weight: Ireland was getting out of its troubles faster than other peripheral economies, as many economic migrants have gone back to whence they came, and the swiftly falling real wages (="flexible" labour market) have pushed down unit-labour costs, increasing competitivity, saving the trade balance and making the bail-out more or less unecessary.

But Ireland already had a trade surplus.

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

by A swedish kind of death on Thu Dec 23rd, 2010 at 12:33:30 PM EST
[ Parent ]
Even more an argument that there was no need for the bailout, and that Ireland was served by having a "flexible" labour market.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Dec 23rd, 2010 at 04:07:45 PM EST
[ Parent ]
The Irish labour market doesn't really have anything to do with it, unless you wish to argue that its pre-existing balanced trade is due to labour market FlexibilityTM.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Dec 23rd, 2010 at 04:23:35 PM EST
[ Parent ]
Since the problem with the Irish economy was taking on the banks debts, the bailout was always unnecessary unless the purpose was to circulate money from the countries supporting the bailout to the banks of said countries (via Ireland).

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Fri Dec 24th, 2010 at 06:11:40 AM EST
[ Parent ]

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