The Political Economy of Labour Market Coordination in the Eurozone

This is a link to an excellent article in the Irish Times by Paul Krugman. He argues that the problem in the Eurozone is the inflexibility of the EMU. Spain, Portugal, Greece and Ireland did not run high deficits until the crisis hit. Spain was diligent in managing its public finances and produced a surplus. All these countries benefited from huge inflows of capital investment and buoyant revenues made available by cheap credit and low interest rates. Public spending by government tended to reflect this huge surplus in revenue. In Ireland, one only has to think back to the McCreevy budgets from 1997-2001. The economy was booming. Direct taxes on labour and capital fell. Capital gains tax was cut in half (from 40 to 20 percent) in the first FF-PD budget (1997). Tax individualisation and a huge reduction in lower and higher tax rates increased everyone’s disposable income. Half of the economy were taken out of the direct tax net. People spent money like crazy. People could not consume enough. The surplus value of capital (for business) had to be channelled into something. It did not go into productive or entrepreneurial activity. As Davy Stockbrokers clearly show here, it went into real estate; houses, offices, holiday homes, fuelling an asset price bubble. Every political party jumped on the bandwagon. They all assumed you could cut direct taxes, rely on indirect taxes and simultaneously increase public spending on social services. The Celtic Tiger post 1997 was a myth.

The government policy was simple: cut direct taxes, give people back their money, and hope they would get it back indirectly via VAT, which they did.  That is, until the crisis hit.  When people stopped spending their disposable income and surplus capital dried up, government revenue collapsed.  This was a completely unsustainable approach to fiscal policy. The government policy was: we have money, your money, do you want us to give it to CIE and spend it on your behalf? Do you want the state to spent it for you or do you want to spent it yourself? The electorate responded to the latter by re-electing the FF-PD government in 2002 and 2007.  When you give it away, money, like power, is very hard to take back. The government now have to borrow on international markets like never before, to keep the economy afloat. The Irish government began a series of competitive devaluations across peripheral economies of the eurozone by implementing two austerity budgets, and two pay cuts in the public sector. It is an unapologetic deflationary approach to the economic crisis.

The peripheral economies of the Eurozone spent years reaping the benefits of cheap and over supplied money (which in turn increased wages and prices). When the crisis hit, the type of policy response available was limited. Countries could no longer adjust their exchange rates (or devalue their currencies) to bring costs in line with their new fiscal position. The only way to adjust costs in the EMU is through the reduction of wages and prices. Employers (and government as the biggest employer in the state) can do the former. But, it cannot adjust prices. It can only hope prices fall, which they have, in some places. But, Ireland, comparatively, is still a very expensive place to live.

The hands of government are bound by the neo-liberal logic of the Eurozone (see Colin Crouch on this latter point). In the Eurozone, countries can only reduce costs through the labour market. This assumes that labour markets are deregulated and disorganised (as neo-classical economic theory posits) with no political actor capable of resisting cost reduction. This is a fallacy.  Trade unions and labour market institutions exist, and are not going anywhere. It is therefore unsurprising that newspapers such as the Economist and research organisation such as the OECD are blaming European ‘regulated’ labour markets for the inability of governments to adjust properly. If only labour was not organsied, treated like any commodity input in the production process, and labour market institutions did not exist, everything would be hunky dory. The EMU project was and is premised on false assumptions about the labour market.

Most commentators are highlighting government spending as the cause of the fiscal crises in peripheral Eurozone economies. There is some truth in this. But, it is only a quarter of the story. The real cause, or danger, as Krugman argues, is the inflexibility and policy straitjacket of the EMU. This cause is directly associated with the assumption of a  ‘one size fits all‘, ‘science of the economy‘ approach to managing national and regional political economies. National labour markets are being forced to adjust to an EMU mean, rather than by their own national requirements (Crouch, 2002). The question of adjustment needs to factor in the reality of labour market actors and labour institutions. The real question policy makers need to ask is how much national coordination and voluntary cooperation amongst government, employers and trade unions can exist? Are trade unions capable of selling downward wage flexibility to their members? Can they sell a wage freeze? If not, what is the alternative? – It is government imposed retrenchment and social dislocation.

People like Jack O’Connor realise this constraint (and explains why he is in favour of the Croke Park deal). He knows that the alternative is a government imposed adjustment (being imposed on government because of EMU constraints). He knows that the first people to lose their jobs in the public sector are those on short term contracts: cleaners and other lower paid workers. Most of these are in SIPTU not professional associations such as the INTO. It is a catch 22, premised on the constraints of abiding by the political and economic conditions of a shared currency. But, a national based response is only one alternative. The third alternative is a European wide form of neo-corporatism, a European wide trade union movement capable of negotiating European wide labour market policies, to coordinate their interests across the Eurozone. We are a far cry from this possibility. But, it is a logical strategy for political actors (both the government of the state and trade unions) operating within the same currency.

The purpose of creating independent central banks and the EMU was to avoid the politicisation of monetary policy. To ensure politicians do not print too much money. This, again, is based on a dubious assumption. It assumes profit seeking bankers and financial speculators will act prudently. It assumes banks behave in the national interest of the real economy. Also, it is premised on the assumption that central banks and financial regulators are immune from political and business pressure. This has been shown to be complete nonsense in the Irish case. Government as a political actor operating within an electoral cycle cannot print money, and if managed properly by an independent central bank, this is probably a good thing. But, as Krugman argues, this monetary policy constraint ensures that they cannot act when a crisis hits. They cannot resort to an exchange rate adjustment – a traditional policy tool available to economic actors. In a modern democracy, governments are still held accountable for economic policy and economic decisions. But, in the Eurozone, the only policy option available to them is adjustment through retrenchment. A painful social process of deflation which ratchets up unemployment and produces social dislocation.

I disagree with Krugman that exiting the Eurozone is an option. But, unless the Eurozone allows either a) national political economies to flexibly respond according to their national requirements, or b) develops a European wide fiscal strategy that stimulates in a crises rather than expect peripheral economies to adopt harsh austerity programmes then it is unsustainable. Countries, such as Greece, need to be given the option of an orderly default, to restructure their debts. Also, countries such as Germany need to allow the inflation of their economy, to directly stimulate the rest of the Eurozone . The Eurozone needs the fiscal and political capacity to act like a federal state. If this political coordination cannot be developed, or if public opinion is firmly against it, then policy makers in the EU need to seriously reconsider the future of a shared currency. It cannot work in the absence of a shared political, economic and fiscal framework.

The same applies to the trade union movement. It necessitates a new European wide system of wage coordination to counter balance the convergence in currency markets. This requires a new political economy of labour market coordination that transcends national borders. If governments of the state are unwilling to develop the fiscal competence at EU level to ensure all EU citizens share a decent standard of living then trade unions need to go it alone. Trade unions are the only political-economic actor in the market system, grounded in the values of social justice, capable of such a strategy.


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