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The crisis in Europe and the need
for an alternative economic policy
package for the Euro area
Engelbert Stockhammer
Kingston University, UK
International Journal of Public Policy (2011) 7, 1-3: 83-96
International Journal of Labour Research (2011) 3, 2: 167-188
preview
• Crisis is a result of rapid growth of private debt rather than public debt
• ... a result of imbalances within the Euro area
• Imbalances are a characteristic of neoliberal growth regimes.
• Crisis gravely amplified by a dysfunctional economic policy regime.
• Alternative policy regime • Wage policy: higher wages in Germany and inflation!
• Speed bumps for finance
• Non-discretionary, public financial flows: a European welfare state
structure
• Economic policy regime of the Euro zone
• Deflationary bias
• Neoliberalism: rising inequality and 2 growth models
• The macroeconomics of rebalancing
• inflationary or deflationary rebalancing
• reform of the policy regime in Euro zone
• Wage policy: higher wages in Germany and inflation!
• Speed bumps for finance
• Non-discretionary, public financial flows: a European
welfare state
A dysfunctional economic
policy regime
The crisis in Europe and the need for an alternative economic policy package for the Euro area
Engelbert Stockhammer
Kingston University, UK
Budget deficits
Budget deficit (% of GDP) 2007
Germany 0.2 Ireland 0.1
Netherlands 0.2 Greece -5.4
Austria -0.5 Spain 1.9
Italy -1.5
Euro (12) -0.6 Portugal -2.7
Crisis
• Subprime crisis (from spring 2007)
• Financial crisis (from summer 2008)
• Economic crisis (from fall 2008)
• Sovereign debt crisis
• Euro crisis (from May 2010)
Europe’s Lehmann moment
• “on 6-7 May tensions in the sovereign debt markets of some euro area countries spread to other segments of the financial markets. Volatility in the financial markets increased sharply and liquidity conditions deteriorated significantly not only in sovereign bond markets, but also and to a critical degree in the money markets. Transactions within the interbank market declined rapidly and uncertainty among banks about counterparties’ creditworthiness increased.” (ECB Monthly Bulletin June 2010, 41)
• “heightened concerns about the probability of default of some European financial institutions. Indeed, the probability of a simultaneous default of two or more euro area large and complex banking groups, (...) rose sharply on 7 May, reaching values higher than in the aftermath of the collapse of Lehman Brothers.” ECB Monthly Bulletin June 2010, 38-39
• Sovereign debt crisis = (private) banking crisis
EMU policy package
• EU/EC has encourage financial integration
(FSAP)
• No central fiscal policy
• Restrained national fiscal policy (SGP)
• No bail out clause
• Monetary policy: inflation targeting
• Labour market flexibility
EMU. criticism
• Is monetary union a good idea to begin with?
• Post-Keynesians (Arestis, Sawyer), Euro-memo (Huffschmied), H. Flassbeck
• Relies exclusively on labour market flexiblity in case of asymmetric shocks
• Deflationary bias: the CA deficit countries have pressure to adjust
• No coordiation of wage policy: increasing imbalances + race to the bottom
• No plan B for crisis scenario
Neoliberal, unbalanced growth
regimes
The crisis in Europe and the need for an alternative economic policy package for the Euro area
Engelbert Stockhammer
Kingston University, UK
Neoliberalism
• External + internal financial deregulation
• Shift in power relations between capital and labour → rising inequality
• 2 growth models: debt-led and debt-led
• Both try to compensate for weak domestic demand
debt-led Export-led
Center US, UK Germany, Japan
Periphery PIIGS China
Declining wage shares
60
65
70
75
80
85
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
USA
UK
Germany
France
Japan
Growth regimes: economic structure
and distributional policies
Distributional policies
Other factors Pro-capital Pro-labour
Economic structure
Profit-led
Wage-led
Other factors
• Economic structure
• Wage-led vs profit-led growth
Distribution
Distributional policies
Other factors
Pro-capital
Pro-labour
policies “labour market flexibility” Abolish minimum wages Weaken collective bargaining
“welfare state” Increase minimum wages Strengthen collective bargaining
Changes in technology Globalisation financialization
results Weak wage growth; WS ↓
Rising real wages; stable (or ↑) WS
Economic structure
Demand regime Supply regime
Economic structure
Profit-led Investment very sensitive to profits WS↑ → I↓
Wage restraint leads to investment and productivity growth
WS↓ → YD↑ W growth↓→ I→ pdy growth
Wage-led
consumption propensity out of wage income higher than that out profit incomes
Wage growth has strong demand effects that cause investment
WS↑ → YD↑ W growth↑→ pdy growth ... →YD↑→ I→ pdy growth
Other factors
Other sources of demand: Gov’t policy Financial factors: asset price bubble ...
Viability of growth models
Distributional policies
Pro-capital Pro-labour
Economic structure Profit-led
Profit-led growth process
Stagnation or unstable growth
Wage-led
Stagnation or unstable growth
Wage-led growth process
Viability of growth models
Distributional policies
Pro-capital Pro-labour
Economic structure Profit-led
Profit-led growth process
Stagnation or unstable growth
Wage-led
Stagnation or unstable growth
Wage-led growth process
Classifying growth strategies
Distributional policies
Pro-capital Pro-labour
Economic structure
Profit-led
‘Neoliberalism in theory’ - Trickle-down growth
Wage-led
Distributional policies
Pro-capital Pro-labour
Economic structure
Profit-led
‘doomed social reform’
Wage-led
Distributional policies
Pro-capital Pro-labour
Economic structure
Profit-led
Wage-led ‘actually existing neoliberalism’ –
unstable and has to rely on exogenous growth drivers: • credit-led growth • export-led growth
Actually existing Neoliberalism
• Has resulted a in polarisation of income
distribution
• But has not generate a sustainable growth
process
• Has relied on finance-led growth
• Or export-led growth
• It has proven socially unjust
• ... and economically unstable.
Demand effect of changes in income
distribution • Q: What is effect of wage cut on demand?
Keynesian answer: that depends … • neg effect on consumption [Kalecki]
• pos effect on investment [Marx/Goodwin]
• pos effect on net exports [European Commission]
• Overall effect of dYD/dWS is ambiguous (Bhaduri and Marglin 1990)
• Substantial post-Keynesian/Kaleckian literature
• Estimate consumption, investment and net exports
• decompose + identify the effects of functional income distribution
30
The effect of a 1%-pt. increase in the wage
share (Stockhammer et al 2011 CJE)
Effects on private excess demand
EU 12
(openness <15%)
Austria
(openn. 50%)
Consumption 0.37 0.36
Investment -0.07 -0.15
Domestic sector 0.30 0.21
Net exports -0.09 -0.39
Total effect 0.21 -0.18
Overview. Results on distribution-
led demand regimes
Domestic D Total D
wage-led Profit-led wage-led Profit-led
Euro area SOE09 SOE09
Germany BB95, NS07, HV08, SHG11, SS11
NS07, HV08, SHG11
BB95
France BB95, NS07, ES07, HV08, SS11
(SO04), NS07, HV08
BB95, SE07
NL NS07, SS11 HV08 NS07 HV08
Austria SE08, HV08, SS11 SE08, HV08
UK BB95, NS07, HV08 SS11 BB95, NS07, HV08
Japan BB95 NS07 BB95, NS07
USA BB95, HV08, OSG11, (SS11)
NS07 BB95, HV08, OSG11
(SO04), NS07, BFT08
Growth models in last 25 years
• Race to the bottom: declining wage shares
• Fall in wage share has led to a stagnation of domestic demand
• 2 growth models in response: credit-led and export-led growth → international imbalances
Credit-led Export-led
Center US, UK Germany, Austria,
Japan
Periphery Greece, Ireland,
Portugal, Spain
China
A wage-led growth strategy
Distributional policies
Pro-capital Pro-labour
Economic structure
Profit-led
Wage-led Wage-led growth strategy
European imbalances and
rebalancing
The crisis in Europe and the need for an alternative economic policy package for the Euro area
Engelbert Stockhammer
Kingston University, UK
0 = BS + SF + SHH – NX
• One sector‘s financial asset is another sector‘s
financial liability
• BD = SF + SHH – NX
• Currant account deficit = capital inflows
• What‘s the active variable? Capital flows or trade
flows?
Neoliberalism
Financial
deregulation
Polarization of
income distribution
internal
External Temporary relaxtion
of BoP constraint
2 growth models
Stagnant domestic
. demand
debt-driven
consumption
Export
orientation
CA surplus
Capital
outflows
CA deficit
Capital inflows
Asset + housing
price bubble
The build up of the crisis
Germany: GDP, priv. cons., adj
WS (1994 = 1)
0.92
0.93
0.94
0.95
0.96
0.97
0.98
0.99
1.00
1.00
1.05
1.10
1.15
1.20
1.25
ad
j. w
ag
e s
hare
GD
P, co
nsu
mp
tio
n
Priv cons.Ger
GDP.Germany
Adj WS.Ger
ULC (2000 = 100; AMECO)
90
95
100
105
110
115
120
125
130
135
140
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Germany
Netherlands
Austria
Ireland
Greece
Spain
Italy
Portugal
Growth of ULC 2000-08
ULC 2000-08
Germany 3% Ireland 33%
Netherlands 19% Greece 26%
Austria 9% Spain 30%
Italy 27%
EA12 16% Portugal 24%
Real GDP growth 2008-2000
GDP 2000-08
Germany 10% Ireland 40%
Netherlands 17% Greece 35%
Austria 19% Spain 28%
Italy 7%
EA12 15% Portugal 8%
Increase in household debt (% of GDP)
Increase in HH debt (in % GDP) 2000/08
Germany -11.34 USA 26
Netherlands 32.83
United
Kingdom 28.13
Austria 7.91
Ireland 62.72
Greece 35.46
France 15.75 Spain 33.84
Portugal 27.38
Source: Eurostat, except USA: FoF
Current account (% GDP)
Current account (% GDP), avg. 2000-07
Germany 3.8 Greece -8.5
Austria 1.7 Portugal -8.9
Netherlands 5.6 Spain -5.8
Italy -1.3
Ireland -2.1
Neoliberalism
Financial
deregulation
Polarization of
income distribution
internal
External Temporary relaxtion
of BoP constraint
2 growth models
Stagnant domestic
. demand
debt-driven
consumption
Export
orientation
CA surplus
Capital
outflows
CA deficit
Capital inflows
Asset + housing
price bubble
The build up of the crisis
How can the €-zone re-balance?
• One sector‘s financial asset is another sector‘s financial liability
• BD = SF + SHH – NX
How much rebalancing is necessary?
• ULC 25-30%
• German wage growth has to be 2.5%-pts. above mediterranean wage
growth for 10 years!
How can the €-zone re-balance?
• 1 deflationary adjustment in deficit countris
• Big contraction in PIGS to bring down GDP and ULC and thus, ultimately, CA-deficit
• But: that means rising debt ratios!
• 2 inflationary adjustment in surplus countries
• Expansion and/or wage inflation in Germany
Wage coordination
• European system of coordinated wage bargaining
• As part of a new policy economic policy mix
• Aim: • ensure that living standards of the working class are
growing
• Prevent excessive inflation
• Prevent/counteract imbalances
• wj = xj + pT + a(ULCEU – ULCj) • w..wage growth, x..productivity growth, pT..inflation target,
ULC..unit labour costs,
• Subscripts EU and country j
• pT would have to be set such as to avoid deflation in all countries, while allowing rebalancing
obstacles
• No one wants it • EC, ‘mainstream’, employers seeks to get rid of collective
bargaining
• Unions are afraid of loosing their field of influence
• ...but • The present system is not working
• Would allow more direct control of wages (and inflation)
• Internalization of externalities
• Can it be done? • Requires institution building at European level
• Goverments try to influence wages all the time: Schulten (2004) lists 29 wage pacts in 12 European countries
• Would have to give unions some say in other policy areas: coordinated macro policy
EMU reform: actual
• Fiscal policy: further tightening • Monetary policy: half-hearted
• Initially made things worse by putting pressure on Greece
• Then bent its rules to back Greek gov‘t bonds • No indication that ECB will change inflation target
• No bail out clause: effectively suspended (EFSF) • But like standard IMF austerity program • Without devalution, without restructuring
• Wage policy: pressure on wages, no indication of coordination
• Assessment: barely survived first suicide attempt
Has it worked?
(Source: OECD ECO 89)
2009 2010 2011
Real GDP growth. Ireland
-7.6 -1 0.0
Real GDP growth. Greece
-2.0 -4.5 -2.9
Real growth. Portugal
-2.5 1.3 -2.1
Inflation. Ireland -1.7 -1.6 1.3
Inflation. Greece 1.3 4.7 2.9
Inflation. Portugal -0.9 1.4 3.3
Inflation. Germany 0.2 1.2 1.6
Conclusion
The crisis in Europe and the need for an alternative economic policy package for the Euro area
Engelbert Stockhammer
Kingston University, UK
Conclusion
• Imbalances are results of neoliberal growth models; interaction of financial liberalization and the polarization of income distribution.
• Policies to fix the broken accumulation regime have to address financial regulation (internal and external) as well as wage policy.
• Crisis amplified by dysfunctional economic policy regime.
• More egalitarian destribution of income is not luxury that can be taken care of, once the crisis has been resolved – distributional issues are at the very root of the crisis
• Wage policy: wage growth is precondition of consumption growth without exploding debt
• Wealth: equal distribution of wealth comes with less speculation
Wage policy: coordination, higher
wage growth in Germany! • Wage policy so far has relied on wage flexibility and
effectively encourage beggar-thy-neighbour via-wage-moderation policies
• Results: • Falling wages shares across Europe
• Rising divergences
• If the Euro is to be saved, EU needs to rethink wage policy: coordinated collective bargaining • → higher wage growth in Germany (surplus countries)
• Higher inflation in Euro-land
• Wage policy as means of rebalancing
• To get there need social partnership and a greater say of unions in other policy areas (social and monetary policy)
Conclusion (finance and gov’t)
• Financial sector – introduce speed bumps for financial flows • private financial flows have fuelled imbalances
• Regulating the shadow banking system
• FTT: fiscal income
• Not-for-profit financial sector
• Fiscal policy: tax policy to decrease wealth inequality • Wealth
• Effective taxation of the financial sector
• Closing of tax loop holes, offshore financial centres
• Systemic public financial flows across Europe – A European welfare state • European unemployment benefit system
• Pay-as-you-go pension scheme
• Public housing