The Economic Governance of the Eurozone – transnational wage setting and fiscal policy?

This is a link to the EU Commission document outlining its new proposals on economic policy coordination in the Eurozone. The most significant (and controversial) aspect is the proposed peer review by member states of national budgets prior to parliamentary approval. As Arthur Beesley in the Times writes today –  this has, historically, been the cornerstone of economic policy sovereignty. Philip Lane has a useful synopsis of the document here. Are we witnessing the beginning of federal economic governance within the EU? In principle, greater fiscal and (as I will argue) wage setting coordination is a welcome development. But, it requires a lot more scrutiny.

It will certainly cause controversy, with Fine Gael already claiming that Ireland has lost economic sovereignty to Europe. This is a far fetched and populist line to take. The reality is that Ireland cannot (nor any other Eurozone economy) continue to operate in monetary union, with a shared currency, in the absence of greater transnational fiscal coordination. We either leave the Eurozone or accept the logical step of greater, and more enhanced, fiscal coordination. But, if we accept the latter then we need a robust debate in the Euro public sphere on the future of transnational European economic governance.

The Commission should go further and have a full self-reflexive analysis of the constraints imposed by the Growth and Stability pact for peripheral Eurozone economies. The 3 percent fiscal deficit target is simply not realistic. It was designed for a period when EU economies were in full growth, job creation expanding and many countries running a budgetary surplus. Asking countries like Ireland to reach this target by 2013 in the absence of a stimulus package aimed at increasing national income is irrational. It cannot be done without driving the real economy into a prolonged recessionary slump. Governments and electorates will have to accept austerity – but not at any cost.

Trade unions and labour market analysts need to fully internalise the constraints of the Eurozone in the absence of a devaluation. In the absence of leaving the Eurozone and adjusting the exchange rate, the burden of ‘adjustment’ inevitably falls on the labour market, and tax and spend policy. This requires a self-reflexive examination by the union movement: can it engage in a collective strategy on downward wage flexibility? If so, what will the government and employers offer in exchange? What will the new bargain look like? If not, what strategies can they pursue without leaving the Eurozone? The only strategy available is transnational wage setting and labour market policy akin to what the Commission are proposing on fiscal coordination.

The problem in Ireland’s public finances is directly related to a total collapse in revenue – as this analysis by Nat O’Connor clearly illustrates. The tax cutting budgets from 1997-2002 are primarily responsible for shifting Irelands tax base from a sustainable position to an unsustainable reliance upon indirect consumer taxes, many of which were wrapped up in construction related activity. Indirect taxes are by their nature regressive. Those who can least afford to pay end up carrying a larger proportion of the burden relative to their income. One can only speculate about whether the EU Commission would have allowed Charile McCreevy to radically overhaul our tax system post 1997. It is well known that the then Minister for Finance did not even consult the Taoiseach of the day. By 2007 the total tax take to GDP (including social security) was 31.7%. The fifth lowest in the 27 member European Union, and the second lowest in the Euro area. Indirect taxation makes up 43 percent of total revenue, as shown on P 176 of this document by Eurostat. Personal income tax only represents 7 percent of GDP!

The economic structure of taxation is as follows:

  • Consumption 35.8%                      (EU 27 average – 33.6%)
  • Labour 34.2%                                   (EU 27 average – 45.2%)
  • Capital 30%                                       (EU 27 average – 21.3%)

There is a connection between tax and spend policies and how wages are coordinated in national economies. This link is not made explicit in the EU Commission document. The Irish government made a strategic error by cutting public sector wages without opting for  a collective increase in taxation – a fairer mechanism to distribute the burden in the 2009 budget. Going after pay first began a process whereby austerity and improved competitiveness was automatically equated to a reduction in wage costs for employers. This has discredited the possibility of a wider tripartite bargain on national recovery, jobs and investment with the current government. There is no trust and no shared understanding on the collective action problem all actors face. But, more importantly, it shifted attention away from the causal factor behind our public finance crisis – an unsustainable tax structure and revenue base.

This emphasis on wage costs is only briefly mentioned in the document. There is no mention on the structure of taxation. On page 3 there is a direct reference to competitiveness and macro economic structural imbalances. Competitiveness is not defined, but it goes on to talk about the necessary adjustment in wages to bring Eurozone economies back into convergence (meaning, wage costs diverged over the years).  When the Commission refers to competitiveness it is generally talking about nominal wage costs. It makes no reference to the divergence in inflation across the Eurozone, the cause of this inflation or how to tackle it without accepting inflation in one country (Germany) to allow for a structural balance in disinflation in peripheral countries.

On P 6 the issue of competitiveness is contextualised within the Europe 2020 Strategy for Growth and Jobs. Again, what is meant by competitive developments is not specified. But, when outlining the ‘surveillance scoreboard’, upon which member states will be assessed the following indicators are included: real exchange rates (i.e. the real price difference between a cup of coffee in Ireland and the South of France), productivity and unit labour costs. These dimensions have not been discussed in the public sphere as all the focus is upon the fiscal framework score cards. But – if real policy transnational coordination on these issues occurred it would radically overhaul the national wage setting and wage bargaining systems of member states.

Economic policy coordination in a shared currency is not just about a new fiscal framework: tax and spend. It is about the coordination of the remaining policy tool available to economic actors in the absence of exchange rate adjustments: wage setting.  But wage setting institutions are remarkably diverse across each national economy. Every country has a coordinated collective bargaining regime. Some achieve wage setting via national income agreements, some via legal extension but most are organsied on a sectoral basis. The UK is the only country that is completely disorgansied and decentralised.

So, are we looking into a future where the sectoral wage agreements of Germanys metal working sector will be used to set rates of pay in Irelands wage bargaining rounds? How is this achieved if we continue with enterprise free-for-all bargaining? Thus, the question is not just how government coordinate fiscal tax and spend policy. It is about how trade unions, employers and government coordinate wage setting across borders.

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