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Was the Euro outright an anti-labour project?

by das monde Mon Dec 13th, 2010 at 07:23:50 PM EST

This is from a Bloomberg Businessweek article Can the Euro Survive?:

It's been known for years -- centuries, really -- that monetary unions are hard to hold together [....] As theorized by Robert A. Mundell, the Nobel Prize-winning economist at Columbia University, a monetary union can't survive without something very close to political union, including free mobility of labor to nations where jobs are more available, flexible wages, a tax system that transfers funds from the winners to the losers, and strict rules preventing members from running up big budget deficits.

Now that we know what "free mobility" and "flexible wages" mean: If these neoliberal components are indeed vital for monetary unions, what was the hope for labouring masses? It was actually "third way" Europe's labourists and socialdemocrats who did the final push for euro. Did they already think along the same theory?!


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

Theories can take suitable assumptions and say anything convenient. If you allow a jump to this judgement source:

Classical theorists like Smith aver that products derive their value from the labor that goes into producing them, and that labor, itself, is bought and sold. Wages, which are the price of labor, have a natural price which is the price needed to enable labor to subsist and to perpetuate itself without either increase or decrease. These dogmas are known as the labor theory of value and the subsistence theory of wages respectively. Some revealing implications can be derived from them.

First notice this oddity: labor produces products and the amount of labor expended determines their value. But labor is paid not the value of the products it produces but merely a subsistence wage. I defy anyone, economist or not, to justify that principle on moral grounds [....]

Second, the subsistence theory of wages describes a condition similar to that used by animal husbands in dealing with livestock. Classical economics treats labor as animal husbandry treats cows. Can treating a fellow human being as a farm animal ever be morally justified? Where is sympathy found in this? Working people, labor, those who create all the culture's wealth, are nothing but farm, factory, and when necessary, cannon fodder.

Display:
Mundell is "theorising" out of his ass. "Flexible" labour markets are completely unnecessary for a working currency union, and government deficits are neither here nor there - they simply have nothing to do with the ability to maintain a fixed exchange rate. Trade imbalances have something to do with the ability to maintain a fixed exchange rate, but the government budget outcome just tells you how the balance of trade is divided between the public and the private sector.

Transfers are, of course, necessary, but that is not difficult - just politically unpalatable for Mundell. Labour mobility helps, but is not essential. Hard caps on government budget outcomes is either evil or idiotic, depending on whether the policymaker who proposes it is acquainted with basic Keynesian fiscal stabilisation or not.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Dec 13th, 2010 at 11:18:07 PM EST
François Mitterand was perhaps a social democrat, but not Third Way. His thinking in pushing for the euro, and particularly in persuading (conservative) Kohl, was that a reunified Germany would be tempted to break free of the EU. The euro was a political project intended to lock Germany in, following the tradition of European economic union leading to necessary cooperation and increased political union. A couple of decades on, the cooperation and governance that should have appeared necessary, have not materialised. Quite possibly because Mitterand's fears regarding German attitudes were not unfounded.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Dec 14th, 2010 at 01:33:39 AM EST
John Kozy, your source of judgement, at least does not appear to be a neo-classical economist. But neither does he appear to be fully conversant with economic history or the history of economic thought. Smith did indeed have a very rudimentary, non quantitative, labor theory of value. Ricardo started to quantify the theory and Marx seized on the surplus value of labor, the difference between what the labor cost, customarily based on the minimum cost of  living for the laborers, and the value that the entrepreneur could get for the product, which was determined by the market, or by the entrepreneur if there was a poorly developed market or is the entrepreneur had pricing power.

Kozy almost seems to have re-invented Marx and proceeds to denigrate the contribution of Smith, who was one of the founding figures in economics. Before Smith and the Physiocrats there was very little that could count as economics. To me Kozy's approach reeks of ahistoricisim. His dismissal of Smith's The Theory of the Moral Sentiments as "sophmoric" along with his general tone brands HIM as sophmoric in my estimate.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Dec 14th, 2010 at 02:03:25 AM EST
Smith did express more concern of labour condition and oligopoly abuse than both admirers and critics are willing to see.

But the settled "natural" price of labour accepts raw power relations without any challenge or limits. Does economy has to be that amoral? Can't there be no theory or workable economy that includes abuse misery considerations seriously? What is the core value of the massive efforts to organize economy?

by das monde on Tue Dec 14th, 2010 at 03:22:38 AM EST
[ Parent ]
Smith was also critical of the activities of The British East India Company. But with regards to economics it is necessary to understand that, prior to Smith and the Physiocrats, excepting perhaps Mandeville, the alternatives to what were being formulated by these emerging economists was, basically, divine providence. The single greatest accomplishment of these philosophers was to move the discussion into the secular realm.

Another consideration is that it was only because Smith was addressing an elite audience and taught elite students that he could be even as critical as he was. Shifting the whole discussion of morality onto secular grounds while creating a secular understanding of the economy was a very significant accomplishment. It is not shocking that he was not also a social revolutionary. Had he been that he would have not succeeded in accomplishing what he did. He was an educator at a time when only the elite got a formal education, even if some were scholarship students.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Dec 14th, 2010 at 01:18:59 PM EST
[ Parent ]
das monde:
Does economy has to be that amoral? Can't there be no theory or workable economy that includes abuse misery considerations seriously? What is the core value of the massive efforts to organize economy?

great questions!

my first response is that until we have an auto-compensating, self-steering robot economy, we will always be dependent on the human hands on the joystick, with all the attendant chaos that ensues when said steerers lose sight of higher social goals, and paranoidly pursue short-term gains at the (huge) expense of the commons, which by now we know to be much more than some 'spare' land on which the poor could better their lives through resource sharing, much more indeed, to include the biosphere and its precarious fragility.

so eventually economy-by-algorithm, but the consensus needed, and perhaps the open source software to guide it are still ahead.

the neo-feudalism to which you refer seems like the default policy for our betters, and it will take a massively diffused response from the people to ensure that ultimate fairness will ensue.

this will take a quantum increase in public awareness, and familiarity with all the newspeak we pick apart here at ET, and this is why the massive cuts in education, i believe, because the empowerment of the masses depends on this to avoid the naked anger of the 'flexibilised' and unemployed otherwise releasing their rage in scenes such as occurred in rome today, which smacked of civil war.

a side note, i was struck by how restrained the video footage portrayed the police forces on the nooze. whether this is selective propaganda will probably emerge sooner or later...

as for core value to an economic philosophy, i think that's just it...to deserve the sobriquet of 'philosophy' it must be oriented to the greatest good to the greatest number, otherwise it's just 'policy', and under neolib forces has become a machine for squeezing labour into an ever decreasing race to the bottom, where globalisation has pitted workers from all over the world to undercut and thus undermine any collective solidarity that could better their declining lot.

agitate, organise, were the watchwords for the keir hardy era, through the wobblies and until genuine labour movements self-combusted on the third way altar, after unions were demonised, and a la reagan and now zapatero, castrated of any real power.

the uphill battle to create a global workers' utopia, as envisaged by marx, (then betrayed by every satrap government that professed intellectual allegiance to such noble, and essentially christian models of social justice,) has been a long and bloody one, and the mindset that opposes such progress has been justified by totalitarian hellworlds created in communism's name, and the centuries of amassing capital and rentier leverage through the concept of private property, amped up through the years to include financialisation of enterprise, sophisticated fractional reserve banking, currency, commodity and real estate speculations and the instrumentalisation of crude lumpenproletariat psychological traits to ensure the hoi polloi are kept chasing chimeras through vulgar media manipulation, distracted from the massive chains that weigh down their lives, and place in hock the next unborn generations' labour too.

farm animals indeed, worked to an early grave, fettered, fenced and fattened, lashed to a procrustean bed of debt-duty, which as some here have keenly observed is taken seriously by those least equipped to game it, and thoroughly ignored by those who design the rules they then break, with mealymouthed excuses and relative impunity.

the poor are thus punished twice, once by their masters, then by their own sense of right and wrong!

what passes for 'economic rationalism' is anything but, as it blithely slithers between multiple 600lb gorillas in the parlour, like planetary climate instability, marauding buccaneers of sovereign (thus weakening) economies, (behaving like a bunch of enraged tyrannosaurii on a last bender as they see the sky darkening from comet impact), malthusian limits, mass dementia religiosa and the spells of titillating frippery (SPEND YOUR WAY THERE!!!!) launched 24/7 at the burgeoning young consumers who will provide the demand, though with what wages remains to be seen.

when effigies of milton friedman hang by their heels on wall st, and someone of the necessary calibre to organise a world wide workers union (that doesn't get taken over by the mob) emerges from the rubble of broken currencies, lost decades, and 0% interest rates, then we'll know the algorithm is tweaked to satisfaction, taxes will be paid willingly, the global civic unity will have crystallised and we'll be able to study the whole sorry saga in the history books, how such a tool as money underwent the formality of occurring, and all the games crooks played with it, before we settled down and took it seriously enough to evolve its use as something fully pragmatic, demonstrably fair, and consistently compassionate.

ponies quite possibly included...

until then we have this hydra headed effort to despoil the planet while screwing 98% of the inhabitants out any quality of life that isn't immediately commodified and sold back to them, often at gunpoint.

yes it keeps me up at night, thanks science for melatonin!

and thanks to das monde and all the commenters for trying to help us see through the mist we're wandering in, and trying also to conceptualise a better, fairer way to use financial policy for greater good.

yay ET, superb...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Dec 14th, 2010 at 07:44:13 PM EST
[ Parent ]
The economy isn't amoral.

The economy's moral basis is that individuals must compete for private property. Accumulation of private property is the only acceptable moral goal.

Smith argued for mitigation of the social damage caused by this idea, but he still agreed with it in principle. And mitigation rather than denial is the basis of Socialism - property rights are fine, some competition is fine, but there should be a safety net rather than economic and social perdition for the losers.

The corollary is that misery will remain as long as forced competition remains. Instead of mitigating the results of failure, it might be more useful to concentrate on mutual aid as a primary goal and reduce competition to a seasoning.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Dec 14th, 2010 at 08:52:47 PM EST
[ Parent ]
Currently, efforts of governments consistently serve only one goal - enforcement of various rentier privileges, including debt claims. Heck, they even try to be innovative in developing new rent frontiers.

What underlies de factor ethics of the modern governments and elite societies is sanctimony of rentiers' "hard work". Anything could be compromised but not their interests.

You know how hard is to earn for a modest house? Now imagine how hard is earn a Miami mansion, ha ha.

by das monde on Wed Dec 15th, 2010 at 05:34:26 AM EST
[ Parent ]
I don't see how 'flexible wages' are necessary to a monetary union.  Germany, with its combination of government policy and collective bargaining holding down working class wages while over the past dozen years while allowing significant income growth for the top twenty percent certainly doesn't. Mobility yes.  You do need people to be able to move from areas with long term problems to ones doing well.  Plus, to the extent that the Euro is part of a greater political project, free movement within the Union is pretty important. And as afew says, the Euro was conceived as an intermediate step on the long road to the creation of a European state.

On Smith, I haven't read him, but I'm wondering to what extent he conceived of the concept of long term system wide per capita economic growth.  Or in other words, did he buy into the just emerging belief in Progress and if so, how did he understand it?  Because at first glance what he's describing is the way things had worked for the vast majority of the population in pretty much every civilization before the combined impacts of rapidly rising agricultural and manufacturing productivity outstripping population growth that only became fully apparent a couple generations after his death.  If you need eighty percent of the population working full time just to produce enough calories for themselves and everybody else, then there's not much room for the population as a whole to have well above subsistence standard of living.

I know several people here have read Smith, care to enlighten us?

by MarekNYC on Tue Dec 14th, 2010 at 02:30:41 AM EST
On Smith, I haven't read him, but I'm wondering to what extent he conceived of the concept of long term system wide per capita economic growth. Or in other words, did he buy into the just emerging belief in Progress and if so, how did he understand it?

Yes and no.

Smith argues that in the steady state, labour will be remunerated at a subsistence level (as will capital, by the way). However, as long as the economy is "improving" - that is, as long as society as a whole keeps getting richer, wages (and profits) can remain above subsistence level, because there is a time delay between the increase in demand for labour and the increase in its supply, which creates a shortage that allows for prices to rise. In the same way, of course, a declining society will push wages below subsistence level, leading to fewer people.

If this sounds tautological - people can get richer when people get richer - then that is because Smith does not have a good model of economic growth. He observed that it happened, and you can certainly re-cast much of what he wrote about growth in modern terms like increasing capital intensity or aggregate demand driven technological progress. But he doesn't quite present a convincing synthesis himself. His comparisons between China and England indicate that he believed that there is some physical limit to growth, related to how much crop you can get out of land. But it is never spelled out explicitly.

If you need eighty percent of the population working full time just to produce enough calories for themselves and everybody else, then there's not much room for the population as a whole to have well above subsistence standard of living.

Indeed, this is an important - no, essential - point for anybody who wants to understand the early classical economists. Agricultural land was the most important factor of production. Bar none, and it's not even a close contest. This is what lead the early classical economists to propose that labour and capital would end up, in a steady state, being remunerated at a subsistence level, because the bulk of the surplus value from production is captured by the constraining factor of production.

When Smith was writing, this factor of production was agricultural land. When Marx was writing, it was capital. When Keynes was writing, it was financial assets. When Galbraith was writing, it was specialised labour and sophisticated organisation. (Today we're back to financial assets, and re-fighting Keynes' fights...)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Dec 14th, 2010 at 02:52:03 AM EST
[ Parent ]
Constraining factors may change over time, but an elephant in the discussion room may remain unnoticed. Henry George was quite right that labour and capital are not foes but rather on the same side against the rentier elephant. It is only the rentier whose gain is not bounded by objective need, and has the power to take basically all surplus. The rentier institutions, however abstract, are gaining particularly much power and privileges lately. They quietly might reach soon a neo-feudal breakthrough of historical proportions.
by das monde on Tue Dec 14th, 2010 at 03:36:10 AM EST
[ Parent ]
The rentier must always endeavour to place himself in command of the constraining factor of production - that's the only place where rent can be extracted. You have to have a choke point before you can put up a toll booth. Henry George wrote at a time and place where land speculation was rampant. This tends to be associated with financial instruments being the rent-enabling factor of production. His proposed fix addresses the symptoms by attempting to remove the incentive to speculate in land.

I'm not sure that it's possible to remove rentiers from the political economy altogether - and even if it is, I'm not convinced that it's worth the trouble. In my considered opinion, it's more important to make sure that the rent-seekers aren't banksters - because they are quite uniquely good at finding new and creative ways to blow up economies.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Dec 14th, 2010 at 04:16:15 AM EST
[ Parent ]
Incidentally, it should also be noted that when Smith speaks of "subsistence income" he does not mean the minimal survivable income. Rather, he means the income that allows a labourer to function in society, while also raising enough children to maintain population. So in a society in which a labourer is expected to be bathed and shaven, soap and razors are part of the subsistence income, even though there is no strictly biological reason to regard them as such.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 15th, 2010 at 03:54:40 AM EST
[ Parent ]
Indeed. Smith explicitly makes the point that, if the standard of the society is that the worker should go to work in a clean linen shirt, then that is a part of subsistence.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Dec 15th, 2010 at 02:22:27 PM EST
[ Parent ]
On Smith, I haven't read him, but I'm wondering to what extent he conceived of the concept of long term system wide per capita economic growth.  Or in other words, did he buy into the just emerging belief in Progress and if so, how did he understand it?  Because at first glance what he's describing is the way things had worked for the vast majority of the population in pretty much every civilization before the combined impacts of rapidly rising agricultural and manufacturing productivity outstripping population growth that only became fully apparent a couple generations after his death.

On The Wealth of Nations is organized and written much like an encyclopedia of economics for the 18th century and runs to four volumes in the original. That makes it very time consuming to read in its entirety, but convenient to dip into on specific topics. Towards the end of Book I is a section entitled: "Different Effects of the Progress of Improvement upon the real Price of three different Sorts of rude Produce" and a little later: "Effects of the Progress of Improvement upon the real Price of Manufacturers"

Smith was very familiar with the idea of progress, having been from late 1763, on David Hume's recommendation, the tutor to Henry Scott, the young Duke of Buccleuch at double his income from the Chair of Moral Philosophy at Glasgow and a pension of equal amount. This entailed touring Europe as well as tutoring and he spent time in Geneva with Voltaire and in Paris, where he spent time with Turgot and Quesnay, among others.

Smith was also familiar with the early progress of water driven mechanization of textile production in England and both the carding and spinning of thead had been mechanized by the 1740s and Arkwright had patented his improvements of Kay and Highs' spinning machines in the 1760s. Arkwright's first continuous cotton mill was in operation a few years before the publication of Wealth of Nations.

But Smith's sensibility had been formed well before the Industrial Revolution had begun and Wealth of Nations was published before the factory system had transformed English society. Smith's approach hearkened back to Bacon and Newton and was empirical and descriptive, not deductive.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Dec 23rd, 2010 at 05:59:11 PM EST
[ Parent ]
Classical economics treats labor as animal husbandry treats cows.

Smith, Marx, Mill, George treat labour as animals? The author must have mixed "classical" and "neo-classical."

by kjr63 on Tue Dec 14th, 2010 at 05:38:00 PM EST
Wikileaks released a 2004 cable commending the Irish economic miracle. The C&L blog decodes the strategy:

Step One: Strike when labor is at its greatest disadvantage ....

Step Two: Get organized labor's buy-in by calling it a Social Partnership ....

Step Three: "Dictatorial Leadership" [aka "market discipline" ....]

Steps Four and Five: EU Support and US Offshore Tax Breaks ....

They know their way.

by das monde on Thu Dec 16th, 2010 at 07:14:30 AM EST
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 ]
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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