The impossible task of negotiating a competitive devaluation….Or, is it?

Last week it appeared as though the government (or Brian Cowen specifically) accepted a proposal by public sector unions on the introduction of unpaid leave instead of pay cuts coupled with a radical reform of public service delivery. A deal was practically complete. But, within a few days, the government rejected the proposal (talks broke down in the past few hours) and now they will implement pay cuts in the budget next week. What we are witnessing is a government (or a Taoiseach) in complete paralysis. The government made a decision, could not hold their nerve, and now all actors look weak and uncoordinated. It seriously calls into question the ability of the current government to negotiate. The full text of the government statement can be found here.

After the deal was provisionally complete, the media went on a tirade against the government. Some of the analysis was informed by a genuine conviction that the government should rule unilaterally but most was based on a complete mis-understanding of the deal on the table. None focused on the acceptance by public sector unions to accept radical reform of service delivery. An agenda that would radically reform public services in ireland and benefit all citizens. It was obvious that many will not be satisfied until there a public sector wage cuts and this is what is informing policy debates. It is more ideology and vendetta than rational policy making at this stage and it is destroying the capacity of our institutions to develop a coordinated response to the crisis.  FF backbenchers felt the pinch of this media pressure and the cabinet did a U-Turn. But, it is highly unlikely that the Taoiseach capitulated to his backbenchers.

It seems to me that the the Taoiseach himself did a u-turn on the decision in response to an economic agenda of labour costs competitiveness . IBEC , other business associations and many economists have been looking for a pay cut in the public sector as a benchmark for a reduction in wages across the entire economy. As mentioned in previous posts there is little or no evidence to support the claim that there has been a widespread reduction in wages across the private sector economy. Normatively it is being desired, in the absence of currency devaluation. So, what we are witnessing is a demand for  a competitive devaluation via a collective reduction in labour costs. Many have made an informed policy argument for a collective reduction in wage costs on the basis of Irelands position within the EMU. But, the contours of this argument are very different to what the Irish public have been exposed to in the last eight weeks.

What is completely lost in this lust for pay cuts is the impending industrial action that the country will now witness. The same people who venomously want public sector pay cuts in the budget will be the same people who will attack the inevitable strategy of industrial action.  They will then go on to attack a weak government for failing to deal with the industrial action.  This political dimension to incomes and fiscal policy is completely lost on those who conceptualise labour costs as an accounting exercise. But, what is more ironic, is that we, in Ireland, have arguably been one of the view countries in the EU with an astute awareness of how to negotiate this process with societal stakeholders. Yet, they failed to internalise the reality of EMU constraints.

The public sector unions will be furious as they will be facing a backlash from three areas. One is the ever depressing right wing press (which is pretty inevitable) who will be celebrating the policy option of pay cuts. Secondly, those public sector employees will now witness a pay cut will begin to question their existing leadership, and thirdly those who insisted that calling off the strike last Thursday was the wrong decision. The latter now looks correct (from a strategic perspective). The militant sections of ICTU will become more legitimate. A vicious circle will emerge. Finance will adopt a cut and burn strategy and all the lessons from the past 20 years lost. The impact on the public finances will be minimal and all we will be left with is a society tearing itself apart.

It is going to be a long winter.

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