Europe’s internal adjustment

14 Feb

With all the talk of competitive currency devaluations and international currency wars, less attention is being paid on the arresting fact that some countries within the Eurozone are achieving what many thought they could not: an internal devaluation via wages and other production costs.

A consequence of this is that some Southern European economies are regaining shares in export markets, their products cheapened by a mixture of labour market reforms and downwards pressure on wages. The FT recently reported that in Portugal exports in 2012 rose by 5.8%, with exports to outside the EU rising 20% in this period. This was Portugal’s third consecutive year of plus 5% export growth. Writing about Spain, Tony Barber suggested that a similar phenomenon was occurring in the Spanish manufacturing sector. Car companies planning to reduce production in France and Belgium are boosting output in Spain. Nissan has committed 130 million Euros of extra investment into its Barcelona plant in order to raise annual production to 80,000 units. Ford, Renault and Volkswagen have all followed suit with their own investments. Barber explains that lying behind such decisions are changes in Spanish labour laws. A reform package last year introduced by the government has loosened up collective bargaining practices, making it easier for firms to negotiate favourable terms with workers.

The ability to boost export competitiveness by internally devaluing is not uniform across the Eurozone. France has enacted its own labour market reforms but labour costs remain significantly higher there than in Spain or Portugal. Monti in Italy has been less successful in pushing through labour market reforms. This unevenness has had the effect of exaggerating the competition between countries within the Eurozone. Unable to compete with one another via national currency manipulations, competition is realized via changes in the labour market. Accepting lower wages has become a matter of national duty in today’s Eurozone.

This development has various implications. The first is that it seems parts of the Eurozone are able to achieve what we thought was only possible in the olden days of the Gold Standard: internal adjustment where the burden falls upon societies, not currencies. This worked back then because there were far fewer public expectations about jobs and welfare to challenge the harsh assumptions of Gold Standard supporters. When such internal adjustment became intolerable, it collapsed. We might have expected something similar today. In fact, the quiescence of European labour has made internal adjustment possible. In some places, it has meant hollowing out national democracy in favour of more stable, technocratic alternatives, but the single currency remains. Differences between the constraints imposed by Eurozone membership and those of the Gold Standard help explain some of the stability of the former but not all. Much is also due to weak labour militancy.

Another implication dovetails with a previous post on falling productivity in the UK. In some Eurozone member states, productivity figures have improved. In Spain, productivity is has risen by 12% since mid-2008. However, such increases have not been achieved via any labour-saving investments. There have been no marked technological developments that explain rising productivity figures. Rather, gains have been made through labour itself. This tells us a great deal about European capitalism: it is far easier to claw back price competitiveness via assaults on labour than it is to boost productivity through capital investment in research, product development and technological improvement. Paradoxically, we can say that weak labour militancy results in low incentives for firms to channel capital into labour saving technology.

The kind of internal adjustment taking place within the Eurozone is thus hardly a victory for supporters of austerity. Competiveness is boosted in short-term ways, via downward pressure on wages. There is no longer term gain in productivity that might actually leave a socially useful legacy for societies as a whole. Recessions and social upheavals in the past had the same human cost in terms of wasted lives but they came with great labour-saving inventions and other gains. European leaders are so worried about currency wars precisely because Yen and Dollar devaluations threaten to wipe away the marginal gains in price competitiveness their businesses have made. And they know that were this to occur, there would be nothing much left. Only the waste.

5 Responses to “Europe’s internal adjustment”

  1. Phil February 14, 2013 at 9:52 am #

    Fascinating insights. Who would’a thunk it, the southern countries are finding “success” at competitiveness so quickly. If this sustains for a while, it’s only a matter of time until Germany starts complaining about unfair competition from the South, hollowed-out labour standards and rock-bottom wages. Oh, the irony.

    But tell me: why should this be seen as a failure for the austerity heads? Was austerity ever about achieving productivity gains through new investments and new technologies? I would think quite the opposite. The message of austerity is that Spaniards (&c) have for years lived above their means and therefore now have to tighten their belts, pay for their prior sins by laying into hard work, and taking whatever deal they may get for it – precisely the new attitude which this piece describes.

    To what extent that would be a sustainable strategy for economic development, let alone social development, of course is an entirely different issue… but it looks to me like austerity is achieving what it set out to achieve.

    • thecurrentmoment February 15, 2013 at 9:08 am #

      On austerity, isn’t it a bit more complicated that just paying your dues? There was always a moral component to austerity politics: behaving badly in the good times means paying for it in the bad times. Lazy and profligate Greeks etc. But more substantivey, it was an argument about how to become competitive in European and global markets. The German view is that this should be achieved neither through more borrowing nor through cheapening the Euro, but by internally transforming the economy. That implies reforming labour markets, bringing down salaries, but also refocusing the economy, finding new niche markets, releasing productive investment by shrinking public expenditure. The supply side revolution. What is striking is that any productivity gains that have been achieved so far in places like Spain has come only from adjustment in wages, hardly the promised supply side revolution which emphasizes the dynamism of the private sector. In those respects, it does seem that austerity has not deliverered, not even on its own terms.

      • Phil February 15, 2013 at 9:22 am #

        What you describe might best be seen as Phase II of austerity’s intended impacts, with Phase I being to bring down labour’s share, and only then will we presumably see private investment in industry follow, realising the opportunity and stepping into the gap left by the retreating welfare/debtfare state – in theory at least. In practice we may see more of this: low-wage low-tech service jobs (for instance: eldon-adelson-las-vegas).

        Yet the question of how Germany would react, should the German-prescribed medicine actually “work” at making Spaniards more like Germans (that is, contentedly wage-repressed exploitable high-skilled workers) is simply too amusing… As a resident of Germany, I simply don’t see them happy to be beaten at their own game!

  2. Eoghan February 14, 2013 at 10:30 am #

    One of the standard centre-left responses to this social burden generated by the increased economic competition between member states is the need to counter the current neo-liberal model of the EU as a giant free trade zone with a more federal and integrated Europe that would allow for fiscal and social harmonization. In a previous entry on Michel Aglietta you rejected moves in this direction on democratic grounds, rightfully arguing that a further transfer of powers to the European level would result in deepening the gap between the exercise of political power and popular control. Yet are not predominantly national responses to the crisis inevitably going to lead to a race to the bottom, with states believing that wage discipline and social welfare cuts are necessary to succeed in the zero-sum game of Hayekian Europe?

    • thecurrentmoment February 15, 2013 at 9:02 am #

      Very good point. It certainly does seem that a race to the bottom in terms of running down labour market regulation may be the way things are heading. And if that is the case, then places like Spain and Portugal may win out, France and Italy will most likely lose. This is another example of intra-eurozone tensions, like the battle over trade surpluses and deficits between member states. What doesn’t follow, though, is an argument about recasting decision-making at the pan-European level in order to stem the Hayekian tide. Given the nature and record of existing governments, why do we think that they will suddenly change their spots and become pioneers of a European welfare model if decision-making is transferred to the European level? The change in scale doesn’t automatically lead to a change in politics, unless we believe that the only reason national governments in Europe today are pursuing austerity policies and pushing down wages is because “globalization made them do it”. The real battle over what to do needs to be fought at the national level. Shunting it up to the European level doesn’t seem a solution, though it is one dear to quite a few European social democrats.

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