Excessive Macro Imbalances

1. Excessive Macro Imbalances ETUC ‘technical’ group of the CCCB June 2012 rjanssen@etuc.org

2. After the scoreboard: A breef look at the ‘in-depth country reviews » • France, Italy, Spain, Finland • Whatis the ‘logic’/ the Commission thinkingbehind ? • How doesthis relate to the standard criticism of ‘symmetricaladjustment’ ? • No graphs!

3. Common structure • Strongemphasis on current account deficits, highindebtedness (both public as privatesectordebt), competitiveness, wages. • Underlyingthinking: Unsustainableexternaldeficitslead to unsustainable (and external) debt positions • Nextstep: Link high and risingexternaldeficitswithdeterioratingcompetitiveness (However, also a rather good analysis of massive capital flows and Spanishhousing/debt boom) • Ultimatestep: Explaincompetitivenessthroughwages

4. Whatwagecomparisons ? • France: Rise in nominal ULC’scomparedwithGerman ULC development (1,9% versus 0,5%) • Italy: Increase in nominal ULC’scomparedwith Euro Area average ULC increase (2,3% versus 1,6%) • Spain: High growth of wageswellabove the increase in productivity, ULC wellabove the EA average • Finland: Real wageincrease plus inflation offset by productivityincrease in mostyears, but not in 2008/2009 crisis (ULC mostlybelow EA average: not mentioned). Excess of 2008/2009 to becorrected

5. Resulting in the knownrecommendations • Limit minimum wageincrease in France • Internalise lowproductivity in Italian national/sectoralbargaining • Rapid and vastdownwardswageadjustment in Spain throughimplementation of decentral and opening clauses/end indexation • Finland: Continue withmoderatewage agreement to repair the 2008/2009 wagecostexcess

6. Surprising: Analyis of non pricecompetitivenessfactors • Germany increasing export shares in world trade,thanks to foreigndemand,nonpricecompetiteveness. Price competitivenessonly a veryminorrole • France:’nonpricecompetitivensslosses have been the main factor behindpoor export performance ’ • Spain: Maintainedits export share in world trade (second best export performer after Germany). Thanks to specialisation in markets and regionsthat are experiencingdynamicdemandgrowth; 1% annual export growthlossbecause of ‘wagecompetitiveness factor ’. Only 1% of firms account for 66% of exports and these are highly productive companieswithlower ULC dynamics: Scale of Spanishcompaniestoosmall (insufficinet to overcomefixedcostswhenseeking to export) • Finland: Demise of Nokia. Finland’s position as innovation leader in the EU isatrisk • Italy: product mix similar to emergingeconomiesinstead of complementingit but Italy’strade has moved up the qualityladder. Firms are toosmall to export (if same size as Germany, 37% more exports)

7. A second surprise: It’swages all over again • Germany: Wage stagnation not somuchtranslatedintopricecompetitiveness but also in higher profit margins. • Commission claims higher profits explainhigher R and D, innovation, non pricecompetitiveness of Germany • « Innovation capacity of French privatesectorimpaired by a prolongeddearth of investment’. ‘Insofar (!) as itallowscompanies to build non pricecompetitiveadvantages, an improvement of theircostcompetitivenesswould have a long term impact »

8. Implication: Wageasymmetryis not such a bad but even a desirablething • In the Commission view, if all of us go for wagecost stagnation…. • … the resultis not deflation… • … but increasing profit margins…. • …whichthencanbeused to upgrade/innovate the economy • This is the argument weneed to adress

9. Broadening the discussion further • Nominal wagecuts are also real wagecuts • Transmission from nominal to real wagedynamicscanbedistorted by changing profit margins. Threefactorswork to compensate for competitiveproductmarket pressure: • Financial markets putting a ‘floor’ of 20% or more profitability rates a year • Corporatedebtoverhang (Germany in 2000, Spain right now) • Creditrationing (or memory of creditcrunch), forcing/incitingcompanies to hoard profits and build capital

10. Implications • Permanent depression of demandbecause of bigacroos the boardwagecuts • No deflation but perhapslow inflation (Right now: Falling unit wagecostseverywhereexcept Germany but core inflation kepthigh and at 2% limit ,by Italy, in particular, see Bruegel studies) • ECB not reallyforced to act (single, not a dual mandate). Relaxing the price s • High profits, but no investments (Spanishquote: loss of investmentdynamicsmeansloss of growthdynamics, meansdebtoverhangis more pronounced: Illustrates the dynamics of and the problemswithdebtdeflation) • Cutting nominal wages in the face of a debtoverhang: A sillyidea • As put by the Commission in the report on Italy: • « persistent deflationarypresures and consumptioncutsimply the risk of a negative feedback loopaffectingpotentioalgrowth via the largeradjustmentrequired in the balance sheets of bothprivate and public sectors »

11. To conclude • Core ECFIN thinking: Wages down, profits up, innovation up, structural competitiveness up • On top of this (DG EMPLOYMENT): Wages down in ailingcompanies plus easyfiring (resigning), workerflowsfromailing to succesfullcompanies go up, economyupgraded • If wewant to change anything, weneed a trade union answerhere (both in terms of contents as in terms of strategy to getour points across….)

12. Why not a « symmetric » approach? • German case (as analysed in studyon France)